Antitrust regulators launched an investigation of online bond-trading and foreign-exchange systems owned by several of Wall Street's biggest securities firms to examine whether the trading platforms are used to limit competition.
Several top securities firms, including Goldman Sachs Group Inc., Merrill Lynch & Co., Morgan Stanley Dean Witter & Co., and the Salomon Smith Barney unit of Citigroup Inc. have received requests for information from the antitrust division of the U.S. Department of Justice. The firms either had no comment or said they are cooperating.
A Justice Department spokesman said the agency is "looking at the competitive effects of certain joint ventures in the online bond-trading industry and in online foreign exchange." The inquiry was reported yesterday by the Bond Buyer newspaper and the Web site of Industry Standard, a magazine that covers Internet economic issues.
Ralph C. Ferrara, a lawyer specializing in securities regulation at the New York law firm of Debevoise & Plimpton, said the probe raises "an interesting issue," because a commonly owned utility that boosts price transparency for the entire market but simultaneously gives firms a look at each other's market strategies "is something that is a Jekyll and a Hyde."
The requests for information, known as civil investigative demands, involve the recent formation of several online bond and foreign-exchange portals by Wall Street's biggest firms in various combinations, people familiar with the matter say.
"I think their interest is because the largest firms are involved" together, said John Ladensack, bond chief for the Schwab Capital Markets unit of San Francisco discount brokerage firm Charles Schwab Corp. Schwab, which is forming its own bond-trading portal, has avoided participation in some online marketplaces "because of the dominance of the big players," Mr. Ladensack said.
Electronic bond trading is growing, but has yet to catch on. Such activity represents just 3% to 6% of overall bond trading, according to Tower Group, a technology-research firm, up from about 2% last year.
"It's worth investigating the area. There are questions about how these markets will turn electronic and whether these dealers will control the market place," says Larry Tabb, group director at Tower Group.
A spokesman for Merrill Lynch said one newly formed online bond-trading system that received a government request for information is BondBook LLC, which is owned by a group including Merrill, Goldman Sachs, Morgan Stanley, Salomon Smith Barney and Deutsche Bank AG. Officials of BondBook couldn't be reached to comment.
Another of the big online trading firms is TradeWeb LLC, owned by a group including Goldman Sachs, Lehman Brothers Holdings Inc. and the Credit Suisse First Boston unit of Credit Suisse Group. TradeWeb's trading volume represents between 7% and 10% of all dealer-to-customer transactions in the U.S. Treasury market, up from 2% a year ago, according to Tower Group.
Securities executives said the Justice probe doesn't appear to encompass Treasury bonds. Tom Eady, chief operating officer at TradeWeb, says the firm hasn't been contacted by the Department of Justice.
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