Fundamental Brokers Buys MKI Government Securities, Will Establish Second Market Data Network

Fundamental Brokers, Inc. will become the first inter-dealer broker in the U.S. government securities market to operate two distinct market data networks. FBI has acquired MKI Government Brokers, a smaller competitor, and plans to use MKI's facilities to originate a new large-block market for primary dealers.

Initially, Fundamental will deliver prices from the block market via MKI Financial Network rather than its own Fundamental Information Systems, according to FIS president Ross Klinger. MKI Financial Network wasn't part of the sale. It remains the property of London-based International City Holdings. Fundamental is owned by another London firm, Mercantile House.

The new block market differs from FBI's traditional market in two ways. First, the minimum order size is $25 million. Second, rather than a strict best bid/best offer auction, the block market will take on certain features of a book market, with price screens showing the three best bids and three best offers. Thus it gives dealers "the option of either buying or selling at a price that is not necessarily the best price in order to capture a piece of size or place a piece of size that one might not be able to transact at the best bid/best offer," says Klinger.

Klinger insists that it "really was not the intent" of the new block market to sidestep possible regulation of price distribution in the inter-dealer brokerage business. The General Accounting Office is due to release a report at the end of April on whether the leading brokers in U.S. government securities should be required to make price information available outside the inner circle of the 40 primary dealers (MTR, February 1987).

Should this recommendation be made and implemented, FBI would either have to install its screens at trading institutions beyond the primary dealers, or allow third-party vendors to resell its information. Screens carrying large-block market information, however, might remain restricted to the primary dealers, which are the only institutions regularly trading blocks of that size.

FBI's network is already equipped for that possibility, says Klinger. "If the General Accounting Office does come out with some type of requirement that information be more widely disseminated, we would have the facility to target the information flow to a particular customer, based upon their status as a customer or primary dealer or whatever," he says.

To distribute large-block prices, Fundamental will take over the four pages on MKI Financial Network formerly used by MKI to deliver its own prices on U.S. government securities. The move is based on "logistical expediency," says Klinger, because FBI is anxious to get its new market in operation by May 1st. "We're not putting our general brokerage markets onto their system," he says. "We're not taking any of their other information onto our system. We essentially are leasing facilities for a period of time until we can accomplish a transition."

MKI Financial Network president Larry Barnett is hopeful that his firm's current one-year contract with FBI will become permanent. "We hope to not only have the quality but also the competitiveness, so that maybe they'll be able to use a couple of networks," he says.