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Dealer Balance Sheets and Corporate Bond Liquidity Provision – Liberty Street Economics (Fed Blog)

We link directly the trading behavior of market participants to their balance sheet constraints. We find that post-crisis regulation has had an adverse impact on bond-level liquidity.

Comments
  • Wolfman
    WolfmanMay 25, 2017"Holy Crap! Someone has finally put together all of the data and came to the same conclusion as dozens of credit traders around the world. Increasing restraints on balance sheet lead to diminished liquidity provision by the dealers. Who'd a thunk?…"

A $500 Billion Dollar Investor Developed ‘Cutting Edge’ Technology, and Now it is Sharing It – Business Insider

Full Article: Business Insider

AllianceBernstein has sold the intellectual property and technology behind ALFA to Algomi, a fixed income data platform. AllianceBernstein is also taking an undisclosed minority stake in Algomi and a seat on the board.

Comments
  • Mustang
    MustangMay 25, 2017"The only way to commercialize this quicker is if the technology stack is in alignment with Algomi's technology stack. If not, then this could be very tricky. This also assumes that the software is ready to be commercialized. How it was built for AB may not be in line with commercial purposes. I suspect it's not ready, but time will tell. Despite the buzz, I wonder what timelines T.Rowe, BBH and others were given for an implementation. I got money on '18. A point of cl…"
  • ChipperMay 25, 2017"I don't disagree with everything you're saying, but much of it I do. Please know that my intention is not to attack YOU, but rather to point out where I think your assessment may be flawed - at least in my humble opinion. First, I do not believe any firm will be successful using ALFA (or an ALFA-like system) if it is forced onto the desk of traders. That will never work. Traders need to see the value in using it. I think AB has solved this issue as their traders see a…"
  • Mustang
    MustangMay 25, 2017"To be clear, I don't either like or dislike Algomi. I have been both critical and supportive in the past. I solely comment on market structure with the intent of creating dialogue. I wish them well, but I don't think their good execution has much of an effect on ALFA's success. Somehow, you are conflating the realities of fixed income culture and whether you think I am suggesting Algomi should be on the hook to change that culture. I don't think that at all. I think t…"
  • Goose
    GooseMay 24, 2017"ALFA is definitely a product that can help the buyside navigate. I, and it seems others are puzzled by the choice of Algomi as a dance partner, given what is known about Algomi's success so far. Best of luck to them both. Perhaps a good product in the hand of master marketers will now equal success. The market will decide.…"

Hedge Funds Are Facing a US Criminal Probe Over Bond Valuations – Bloomberg

Full Article: Bloomberg

By carrying securities on their books at artificially inflated prices, hedge funds can show better performance. They can collect more in management and performance fees — or hide poor performance for certain holdings.

Comments
  • Charlie
    CharlieMay 15, 2017"There are two separate (hard) problems here: bad apples and bad prices. On bad apples: As several others have pointed out, if there's a way to tip the scale, someone somewhere will do it. So make it impossible to tip the scale. Not trivial, but it can be done with some clever design. Minimizing direct human influence on the pricing models should help. See Libor as a great example of what NOT to do. Make the pricing model sufficiently complex that individuals find it h…"
  • Goose
    GooseMay 12, 2017"All good points here. The worst thing for the markets will be if the press, incumbents, and regulators see something like this and trot out that exhausted bromide, “MORE ELECTRONIC TRADING WILL SOLVE THIS AND CREATE THE TRANSPARENCY!” FI markets, from structured up the ladder, need to start with the building block of execution, more organization around pretrade information.. Can games be played in inherently illiquid securities with few price points,, most definitely…"
  • Mustang
    MustangMay 12, 2017"If there are incentives to shade something in someone's favor, they will always err on the side of shading it in their favor. If you add in difficulty in discerning "fair value" and limited negative consequences, then you've got a recipe for widespread abuse. That said, this issue seems to be exacerbated by the (a) consolidation in the pricing space that has created a market oligopoly and (b) the lack of transparency and complex nature of bonds to evaluate bonds and (…"
  • Jester
    JesterMay 12, 2017"Bond valuation corruption again? Yawn. Unfortunately, this article gives a false sense of just how wide the problem could be. This is not isolated to “illiquid securities” and this blatant inflation of valuations has not become more pronounced because investors are pulling out of hedge funds. This is an every day problem in a market that has no real method for figuring out current value…objectively. Under the hood of the bond market is a process where billions of doll…"

Voice Communications Solidifying Role in Institutional Trading – Finance Magnates

Full Article: Finance Magnates

Approximately 90 percent of the trading professionals participating in a 2016 Greenwich Associates study utilize voice communications in electronic trades, primarily for post-trade interaction.

Comments
  • Charlie
    CharlieMay 9, 2017"Nice and concise. 100% agree. The million dollar question, then, is: What value does voice provide to institutional investors that electronic doesn't yet, and how deep/wide is that moat? A couple thoughts: 1. Belief that sales-trader has even a tiny bit of useful information. I have to pay a commission to someone anyway, if I can save half a penny on 1mn shares I'm coming out ahead, right? This perception can easily be confirmed once or twice -- either by chance or by…"
  • Iceman
    IcemanMay 8, 2017"Unsurprisingly I fully agree with the comments already made. Execution over chat and phone is still heavily utilized given the bilateral nature of the market and getting color still remains a key part to executing the trade. In EMEA with MiFID II looming all electronic trading platforms are lining up to tell the Buy-side they must execute across an MTF / OTF etc. otherwise it will all be so much more costly, so much harder, the world will end!!!!!!!..... in reality th…"
  • Goose
    GooseMay 5, 2017"“Even in U.S. equity markets, often viewed as one of the most electronic markets in the world, high-touch trading, or single-stock trades routed to a sales trader, still represents the largest execution channel.” Let the above quote sink in. We’ve been banging this drum since the founding of FNL. If this is this is where the most organized, regulated, and liquid market ends up, what are the prospects for electronic trading in the large majority of FI products? The ans…"
  • Wolfman
    WolfmanMay 5, 2017"I think I could have summarized the findings of a study related to the future of voice in trade execution as follows: as long as people receive a value to speaking with a person that is greater than any incremental cost associated with paying that person for the said value, voice will survive.…"

A Review of The Economist Article on Corporate Bonds

Last week the Economist wrote an “article” about the future of the corporate bond market. The piece was so interesting, that this week the Friday Newsletter is presenting reviews of the Economist article from our exclusive team of market structure experts, the 10,000 Hours Team.

Comments
  • Wolfman
    WolfmanMay 1, 2017"There's a lot of anger in this week's discussion. C'mon guys, have a little patience with these guys - they've only been around since 1843! Yes, yes, they have a broad and diverse reader base and yes, yes, they need to keep things at a high-enough level to deal with the aforementioned diverse reader base to understand. Ok, the corporate bond market (the credit market for readers of Friday Newsletter) has been the focus of tens of millions of dollars of VC money and co…"
  • Jester
    JesterApril 28, 2017"A pet peeve of mine is articles that present as news and facts, but are really poorly researched commercials. Make no mistake my friends, this piece by The Economist IS a commercial and it reads like the “reporter” spoke to a single, biased, source. So allow me to help set the record a little straighter than the limp fusilli that is this piece. All to All trading in corporate bonds is in no way a new concept, but all to all RFQ trading is. Bravo to MarketAxess for bri…"
  • The DukeApril 28, 2017"If you want to see platforms' market share and performance over time look at the research on The DESK - https://www.fi-desk.com/focus-on-preferred-platforms-intensifies-competition/…"
  • Sundown
    SundownApril 28, 2017"I read The Economist in college. I'm going to my reunion soon, and I must say I read this article as if The Economist had missed all that's happened in the subject matter or simply got it wrong, for the most part. Serious, completely non-factual falsehoods have me wondering if this is the Wall Street version of "false news". But let's just chalk it up to incompetence. It's a shame the importance and of the meaning of the advent of all-to-all trading's potential to be…"

Bond Tape is a Matter of Time – Markets Media

Full Article: Markets Media

The discussion of whether there will be consolidated tape for fixed income products is no longer a matter of if, but when. The wheels already are in motion for public disclosure of US Treasury trades. They are not moving quickly, but they are moving.  

Comments
  • Goose
    GooseApril 21, 2017"You better believe that a public tape for treasuries is on the way. Once you start collecting data for “regulatory and compliance” purposes, you essentially create the demand for a public tape by investors and dealers. Does anyone want regulators monitoring their trading activity without understanding the benchmarks they are monitoring against? When they do get around to taking the next step, I would strongly caution against the path taken with the FINRA TRACE feed. T…"
  • Jester
    JesterApril 21, 2017"What’s going to be the impact of post-trade reporting for US Treasuries? Well that depends on one crucial factor. Who will be managing the data? From the looks of it, the quasi-government-private institution known as FINRA will be in charge of this precious commodity. Based on FINRA’s previous track record, the full value of this post-trade data will not be realized by the market. FINRA has been notoriously poor at improving the quality and access to data. This is why…"
  • Wolfman
    WolfmanApril 21, 2017"I'm curious to see what sort of reaction the focus article gets this week. We're in an time indeed. Conventional wisdom is that all markets need transparency to operate efficiently, and the broad consensus among regulators and legislators is that we should always err on the side of too much transparency. By the way, these are many of the same people that believed there are times when there is too much liquidity. But I digress. At the core of this article it the notion…"

Tradeweb to Launch All-to-All Corporate Bond Trading in Europe – The Trade

Full Article: The Trade

Tradeweb will extend its all-to-all corporate bond trading service, to be launched in the US later this year, into Europe following an increase in demand for RFQ trading protocols.

Comments
  • Iceman
    IcemanApril 15, 2017"Agreed, always helpful when you have a board of the largest liquidity providers in the market who are the only firms who can vote to make this change to the platform. I think a better question is does this model help the market and what size can you get done. I see this only distorting the value of the asset by making firms believe they can get in and out of assets in size at the same price as an oddlot. Separately what are the fees? and will it be the same for all pa…"
  • Tried and failed.
    Tried and failed.April 14, 2017"The only surprise here is what took them so long? Driven by the need to catch MKTX, not be swayed by the fusion group and leverage the Dealerweb success, this should position TW for increased market share. It illustrates the ability of a large incumbent to be late to the game and still succeed, whereas start-ups who brought the innovation to the market way earlier still struggle for relevance. The tough times for the newbies continue.…"

Let’s Make a Deal(er): Buy-side Requirements for Price Making in Fixed Income Markets – ViableMkts

Full Article: ViableMkts

For buy-side institutions that are formulating a price-making strategy in corporate bonds, a full examination of these key questions can serve as a guide that helps you optimize the benefits of price-making while avoiding the pitfalls.

Comments
  • Wolfman
    WolfmanApril 9, 2017"The Monty Hall picture was a great blast from the past but it's not exactly the "persona futura" of the market. Dealers aren't some game show host giving away money based on chance and greed. They may be more like the banker in Deal or No Deal, lurking in a tower above the market players and pricing in the balance of fear and greed playing out beneath them. Ok, I'm done with the game shoe analogies. What's really at play is the role people play in the markets and the…"
  • Tried and failed.
    Tried and failed.April 9, 2017"What would you rather do, look at the daily diet of billions of stale, bid side bids and offer side offers and no conviction RUNZ from dealers or get the chance to interact with genuine buyers and sellers? As a buy-side you don't have to "price in" the cost of capital, liquidity charge, ageing and market sentiment so you should, in theory be very competitive. You might have to upgrade in terms of trading bench and data analysis, but this arms race is developing fast.…"
  • Mustang
    MustangApril 7, 2017""a buy-side execution trader must transition from a workflow model where they trade what they want, when they want to trade it, to a process that involves trading when opportunities present themselves." Yes!!!! The 5 asset managers that are making a commitment to this strategy have to-- they are too large to not do it. Very few buyside firms have the culture, budget and forethought to do it on their own. Most technology budget is tied up in regulation. I wonder what t…"
  • Goose
    GooseApril 7, 2017"Thoughtful high level piece breaking down some of the decisions and work needed after the “I think I can add liquidity by making prices” statement. Numero uno....Does this make sense for your business? I think a lot of hands go down with that one, but if "yes"... What do I need? Is it worth the potential cost both in technology and relationships? How does it affect fiduciary responsibility? What is the right technology to use? Is it compatible with my legacy systems?…"

Bloomberg Terminal Users Declined in 2016 – The Desk 

Full Article: The Desk

The report found that Bloomberg accounted for 33.40% of market share as a result of growth in its data feed and other non-terminal business. At the same time, terminal counts shrank for only the second time in company history.

Comments
  • Slider
    SliderMarch 31, 2017"I feel that Bloomberg has been asleep at the wheel and really offered much less on the data innovation front than I would expect. There is this entire data revolution going on and they haven't been innovative ENOUGH. Makes sense data business is comprising MORE revenue but given the goldmine of data they sit on, I would have expected a lot more innovation and try/fail ideas. But it is true that it's difficult for bigger companies to innovate given the ingrained cultur…"
  • Goose
    GooseMarch 31, 2017"Best of luck to those that are getting all hot and bothered over the terminal miss. It’s nice to own the delivery mechanism as well as the info delivered, stickiness has tremendous value….but judging from these numbers looks like Bloomberg is making a long term bet on building valuable data and content as delivery gets democratized….and they are doing a pretty good job of it.…"
  • Tried and failed.
    Tried and failed.March 31, 2017"Looks like business as usual at Bloomberg. So much for all the disruptive technology designed to slay it.…"
  • Jester
    JesterMarch 31, 2017"Saw a competitor to Bloomberg post on LinkedIn that this is Bloomberg’s “Blackberry Moment”. I couldn’t disagree more. According to this article, it looks like Bloomberg is expanding their domination in financial market data which in my humble opinion is the most valuable resource in financial markets. Relying less on terminal sales to make ends meet is a fantastic long term play.…"

Bond Quotes and Performance Art – Bloomberg View

Full Article: Bloomberg View

There’s something a bit creepy about this story, which is not so much about a hedge fund that discovered it would lose money if it was forced to sell a bunch of bonds all at once — though that is true — as it is about a hedge fund that looked into where it could sell bonds and found out that everyone’s whole concept of fair value was completely wrong.

Comments
  • Tried and failed.
    Tried and failed.March 25, 2017"This story graphically illustrates the present liquidity gradient in Fixed Income evidenced by at one end of the curve, large liquid, high grade bonds trading frequently in good volume, to the other end described in this case. Regulation and balance sheet costs have reset liquidity provision. Quotes and evaluated prices in any but the most liquid bonds are no indication of liquidity. Look at what the GS trader (quoting 63/66) said; "not making it" (the basis), "I don'…"
  • Cougar
    CougarMarch 24, 2017"This has got my back up in a BIG way. As both a former proprietary and market marker focusing on far more illiquid issues, at worse market times (height of the crisis), I am aghast at the way the client was treated. I would never dream of spivily asking the client where his bid was - amateur nights no matter how tight you are with the client - let alone bond legend Weinstein. I am genuinely shocked the dealer had the audacity to ask this. Nor would I send out bonds ru…"
  • Tried and failed.
    Tried and failed.March 24, 2017"Too true. In spite of all the regulation and Fintech, Fixed Income remains the bad boy of financial markets and still very likely to be instrumental in the next crisis.…"
  • Merlin
    MerlinMarch 24, 2017"Providing appropriate warnings to the retail investing public is a much better solution to the problem than trying to create liquidity where it does not exist. But my bet is the public would still buy anyway and still get shafted. With the reach for yield in the zero rate environment, everyone is set up for the slaughter now.…"