Bringing voices together to promote well functioning markets
Every Friday, we send you an email of top articles related to corporate bond market development. The newsletter is a free service.

Do Buy-Side Institutions Supply Liquidity in Bond Markets? Evidence From Mutual Funds – Syracuse University/SMU 

This study presents new evidence on buy-side institutions as a channel of liquidity supply in the corporate bond market

Comments
  • Charlie
    CharlieJuly 21, 2017"Ultimately, it's the buy side that takes views and invests according to those views. When one fund sells something, another fund has to take the ther side. And the more a fund tends to take the other side, the better its performance. Investors doing that trade benefit from lower t-costs with dealers, helping the latter clean up their balance sheet, and may even get securities at a discount to "fair value". This is all well and good, economically sound stuff. And in a…"
  • Wolfman
    WolfmanJuly 21, 2017"Nature abhors a vacuum.…"
  • Wolfman
    WolfmanJuly 21, 2017"Horror vacui…"

BoE Warns of Threat to Financial Markets From Potential Corporate Bond Sell Off – Investment Week 

Full Article: Investment Week

It found that redemptions worth 1% of the total net asset value of bond funds could result in European investment grade corporate bond spreads increasing by around 40bps, while a sell-off of 1.3% of assets could lead to a 70bps widening. 

Comments
  • Charlie
    CharlieJuly 15, 2017"Believe it or not, there's a valid question under all these Armageddon-style articles about pending doom in corporate bond funds. And the question is: Are corporate bonds still appropriate for an open-end fund structure that offers daily liquidity? The less liquid the benchmark, the bigger the risk that a corporate fund enters the Third Avenue downward spiral: get redemptions, sell your most liquid stuff to meet redemptions (negatively impacting performance), get more…"
  • Goose
    GooseJuly 14, 2017"Here is the cliff notes to the paper. The corporate bond market will get seriously hammered if an event takes place that creates large redemptions. A few more thoughts though before you go. As Merlin points out, what market doesn’t get scorched in this scenario? It seems the BOE is saying that given changing market market dynamics with the same market structure, the beating for credit today will be of a larger proportion. Market doubles in size, top buy size firms are…"
  • Mustang
    MustangJuly 14, 2017"“Suspending Redemptions”. Now here is an interestingly bad solution. If some investment vehicles suspend redemptions and other market participants don’t have redemptions to suspend, what do you think the latter will do in times of volatility? Sit by idly and wait for the market to return to “normalcy”? Nah, hit every bid that those portfolios own. Ultimately, these vehicles and the bonds that they own will also have “redemption suspension risk”. What will mom and pop…"
  • Merlin
    MerlinJuly 14, 2017"Interesting article about BoE analysis but not sure what value this brings other than knowing that the BoE (and hopefully others) understand that yes, spreads widen when there are more sellers than buyers and spreads tighten when more buyers than sellers. Am I being too simplistic? This is the same for all markets so why be surprised that their analysis shows this for the corporate bond markets? Perhaps it is their effort to try and model events to put some meat behin…"

Towards a Fully Automated Stock Exchange (Part 1) – Fischer Black (1971) 

Full Article: Fischer Black

FNL Exclusive: This brilliant article by Fischer Black predicts how technology and electronic trading will change equity market structure. 

Comments
  • Wolfman
    WolfmanJuly 7, 2017"So for the bond geeks who read FN, the obvious parallel is specialist is to equities as dealer is to bonds. I don't think it's that simple or that direct. Small average trade size with a large number of participants are ingredients for a continuous market. BTW, I like the idea of participating orders to help specialists! We don't have that today, but we do have market orders which, in a continuous market, are the equivalent to what Dr. Black proposed. The automation o…"

Lutnick Offers $20,000 Per Month to Trade on New Treasury Platform – FT

Full Article: Financial Times

The decision to offer a financial reward to market makers — the financial institutions that commit to offering prices for other investors to trade — draws on similar practices that already occur more commonly in equity and futures markets.

Comments
  • Cougar
    CougarJuly 1, 2017"I'm undecided on this (and it's not my area). The inducement is equivalent to 40MM turnover on a 5c bid-offer; across the 0-10Y curve that's a reasonable estimate and pure bid-offer so it's more like a 100MM bid-offer in the reality of where MMs trade. So 2 days P&L to get involved? Better than any other offer out there away from being a big shop. Paying 25 accounts this fee for a year makes complete sense to fulfill a virtuous circle to become a liquidity hub.…"
  • Wolfman
    WolfmanJune 30, 2017""When you see that trading is done, not by consent, but by compulsion—when you see that in order to produce, you need to obtain permission from men who produce nothing—when you see that money is flowing to those who deal, not in goods, but in favors—when you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you—when you see corruption being rewarded and honesty becoming a self-sacrifice—yo…"
  • Sundown
    SundownJune 29, 2017"This headline begs the question, "Who really needs the $20,000 to be involved?". Short answer: Not the HFTs (PTFs) who are main providers of liquidity to the platform. No doubt Mr. Lutnick knows from running eSpeed that the majority of the flow in that venue is PTFs (and BrokerTec/Nex)- as much as 70% of ADV. BGC is banking on speed being the main driver of the platform which is the PTFs lifeblood. Because they are unable to source their own flow without a client fran…"
  • Goose
    GooseJune 29, 2017"Interesting experiment from Mr. Lutnick. The model has had success elsewhere. Some key differences are in equities, you have the ability to force engagement with your price due to reg NMS, and in futures there aren’t competing venues trading the same instrument. If they crush tick minimums, they could have better prices. Will that drive flow to them from real money (still thru the banks I am guessing?), who doesn’t have to be there by the letter of the law, or will it…"

In the New Bond Market, Bigger is Better – Wall St Journal 

Full Article: Wall Street Journal

Postcrisis regulations have reshaped bond markets, with the largest asset managers gaining advantages over smaller competitors

Comments
  • Wolfman
    WolfmanJune 23, 2017"First, PLEASE take down that picture! It's disturbing. I have to agree with Charlie and Jester. This isn't an analysis worthy of the journal. The large buy side firms have had a transparency advantage over the dealers for years, and they were willing to benefit from the dealers' wiliness to hold inventory and provide immediacy. I'm surprised that the majority of reporters who write about the bond market don't take on a more macro view. We are experiencing persistently…"
  • Jester
    JesterJune 23, 2017"Seeing a lot of poor reporting on the bond market lately and this is no different. How someone can write an article about the advantages of being a large asset manager in the bond market, but NOT mention the new issue allocation process is beyond me. It is impossible to calculate, but the favoured nation status that large funds enjoy when it comes to handing out new bonds makes a real difference in performance. A large majority of new deals trade higher when they are…"
  • Charlie
    CharlieJune 23, 2017"Wow. Where to start on this masterpiece? Banks as wholesalers and big funds as big-box stores? Such tortured analogies and terrible analysis. Let's just keep it simple. Bank balance sheet is more expensive because of Basel III, and other regulations also pile on to make it harder to hold inventory (e.g. Dodd-Frank). Ergo banks are no longer in the storing business, they are almost exclusively in the moving business (to add my own tortured analogy). And, since they don…"

Dealers Must Up Their Corp-Bond Game – Markets Media 

Full Article: Markets Media

A few weeks ago, Graham Giller, head of data science research, CIB Data Science at J.P. Morgan, shared a conversation he had with a credit trader from his firm about a year ago who said that they did not know the price of things.

Comments
  • Tried and failed.
    Tried and failed.June 19, 2017"In the old days dealers simply knew more about how bonds were trading than their buy-side clients. The buy-side accepted this in return for liquidity provision and dealer profit margins. As the article suggests the information asymmetry has declined with the reduction in immediate liquidity. The question is, what have dealers now got that remains relevant to liquidity? Is it new issues that maintain the dealer/buy-side relationship or is a less well-observed undercurr…"
  • Wolfman
    WolfmanJune 16, 2017"Maybe it's me, but it seems that a relatively small group of buy-side firms are leading the charge to become market makers, or price makers as they like to call themselves. There are valid reasons for a move toward an all-to-all market for credit, but there also seems to be a fundamental need for the dealer/client relationship. Oddly enough, there is also a small group of dealers that are leading the charge to move away from market making and generating revenues from…"

Trump Team’s Bond-Trade Worries Are Too Late – Bloomberg Gadfly

Full Article: Bloomberg Gadfly

Regardless of how substantial bond-market liquidity threats are to financial stability, this study is years too late. At this point, banks and investors have generally adapted to the current environment.

Comments
  • Wolfman
    WolfmanJune 9, 2017"Bloomberg news is just another progressive media outlet and not an independent source of expert journalists who can put personal bias aside. The notion that people have generally adapted to this new world reflects a stronger desire to promote an ideology than to understand the structural impacts of reduced dealer liquidity provision. So, disagree with the conclusion of the "adaption", then you may just be a conservative...…"
  • Jester
    JesterJune 9, 2017"Really liked the data in this article, but there were a couple of huge misstatements that caught my attention. Here was the first doozy: “And it turns out that bond trading can still be lucrative for large banks, even with much less risk. The goal is to rack up enough volume to generate substantial profits, regardless of the fact that each trade is less profitable than in the past. At this point, the biggest lenders employ traders with more experience matching up buye…"

Fixed Income Trading Models: Convergence Ahead? – Markets Media 

Full Article: Markets Media

You’re going to have a portion of the buy side that will continue to do their business through the RFQ model, but at some point, there’s going to be integration with or into the CLOB model

Comments
  • ChipperJune 5, 2017"It is interesting to hear Tradeweb say that one of the bifurcated OTC markets they offer (U.S. Treasury Securities) may be poised to converge into a non-bifurcated marketplace open to all participants. After all, it is Tradeweb that has kept these markets bifurcated at the behest of the traditional dealers. I agree that the emergence of non-traditional dealers in the Treasury market has the potential to move it towards an all-to-all model, but it will be very difficul…"
  • Goose
    GooseJune 2, 2017"I agree that the PTF/HFT can become more of a counterparty for the buy side, they are indirectly doing it now thru the IDB screens. However, unless they decide to begin to warehouse risk on a large scale, they will be provide liquidity for the threshold size they feel comfortable holding very short term. So off the run issue market making does not seem to fit that bill, nor large size on the run. I could see the LOB growing in volume for on the runs as you have more c…"

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.…"