Robert Barsky, coo and a founder, and David Audley, founder responsible for strategic planning at Beacon Capital Markets, answer SCI's questions

Q: How and when did Beacon Capital Markets become involved in the structured credit market?
RB: Beacon was set up in 2004 to promote liquidity in less liquid markets by providing an open trading platform - called the Trade Discovery Platform - to all participants on an anonymous and equal basis. The platform is an electronic engine that matches buyers and sellers of ABS, CMBS and RMBS throughout the transaction lifecycle, including clearing and settlement.

Q: What is your strategy?
RB: We began trading agency RMBS on the platform in April 2008, but our customers urged us to expand into other asset classes - non-agency RMBS, CMBS and ABS - which we launched on 10 July (see SCI issue 142). The aim is to access dark pools/hidden liquidity in the market, including by enabling traders to receive alerts when incoming buy orders match their inventory. We estimate that buy-side institutions hold more than 99% of all the inventory in these asset classes.

The platform has the capability to do auctions, but much of the trading is done via bid list technology that advertises what's available to participants and potential buyers can then negotiate a price. Another common way of executing a transaction is if something is advertised, or posted on the platform. Alternatively, buyers can stipulate what they'd like to buy through describing the ideal characteristics that they'd like to see in a security in order to elicit a response from any potential holders.

Q: Which market constituent is your main client base?
RB: So far we have engaged 52 large institutional and dealer participants on the agency side of the market and 56 on the non-agency side. Daily, there are several billion dollars worth of securities advertised on the platform from our participants.

Beacon acts as executing broker for all non-agency MBS, ABS and CMBS trades, while Broadcort - a provider of clearing and settlement services and a division of Merrill Lynch - will clear and settle the trades. Daiwa Securities is the central counterparty for agency securities, of which there is around 1.2m listed on the platform.

Market participants can locate and trade non-agency MBS and ABS using search methods specifically fine-tuned for these securities. Trade details are automatically captured, creating an electronic audit trail.

Q: How do you differentiate yourself from your competitors?
RB: Our customers are receptive to our trading model and, in this environment, have found it an excellent way to conduct price discovery. One advantage of anonymity is that customers can trade significant positions without the other side of the trade knowing who they are.

But it also allows for opportunistic trading and the ability to find specific securities to service a customer quickly and efficiently. We're essentially adding automation to the marketplace and providing the opportunity to figure out a fair price for high quality assets.

Q: Which challenges/opportunities does the current financial environment bring to your business and how do you intend to manage them?
RB: We think this is an important time to release trading in non-agency securities as the Obama administration advances its PPIP programme using a funding mechanism like the successful TALF programme. Holders of legacy bonds will want to make those available to the new sources of investment coming to market, explicitly to own those bonds.

We're currently establishing direct links to the order management systems that hold customer inventory information, so that traders can receive alerts when someone is interested in buying or selling a security they own. It will also give them the opportunity to answer/negotiate on an anonymous basis.

In order to enhance the user experience on the platform even further, we've formed a multi-year strategic alliance with outsourcing solutions provider Broadridge Financial Solutions. Broadridge currently handles on average over US$3trn in notional value of US fixed income securities transactions daily.

By utilising Broadridge's industry-leading impactSM (for non-agency MBS, ABS and CMBS) and MBS Expert (for agency MBS) products, clients will be able to search through the largest universe of less-liquid fixed income securities, find the other side of the trade for instruments that meet specific investment criteria and transact on liquidity that otherwise would not be publicly advertised in current trading channels. This connectivity is scheduled to go into production over the next few weeks.

Otherwise, the Bloomberg Trade Order Management System can be used to connect to the platform.

Q: What major developments do you need/expect from the market in the future?
DA: The new issue ABS market in the US has improved considerably due to the support of TALF and the bonds are typically better credit quality because of the improved rating agency criteria. For example, indicative spreads have tightened from 500bp over swaps in February to around 100bp over. But the situation for legacy assets is lagging considerably behind that of new issues - albeit the US Federal Reserve appears to be mindful of this, given its indications that it might extend the TALF programme past year-end for legacy CMBS.

CS