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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.…"
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Obstacles to Innovation in Fixed Income – Grant Wilson / Byron Cooper-Fogarty (Tabb Forum) 

Full Article: Tabb Forum

The market seems to broadly agree that innovation is the best way to resolve the problems presented by these pressures and their impact on profitability. As demonstrated by the small number of established utilities or successful fintech start-ups, however, this often is more difficult than it looks.

Comments
  • Iceman
    IcemanMarch 18, 2017"In reality what this article highlights is it is easier for people to make noise about something that they feel is wring than actually support change through actions and as has been highlighted investment. Change does not happen overnight but it does not happen at all if the apathy of the market remains. Easier to talk about something than invest the time and money in what can be a painful process of change. I see thee incumbents happily in control for a long time to…"
  • CelticBond
    CelticBondMarch 17, 2017"Well FI has not taken on board a number of the innovations that has propelled FX or exchanged traded securities. Calling for innovation when invention is required. As mentioned already the statement 'vested interests' well that is the issue. For too long the buyside have also not seen that their market is not working efficiently & to change this investment has been required. I have heard for too long Trading desks say 'they will never pay to trade' or 'Bloomberg i…"
  • Wolfman
    WolfmanMarch 17, 2017"Whilst I agree that technology can solve many of the perceived problems in fixed income trading, we must also follow the money. The incumbents are widespread. Traders, sales people, portfolio managers and yes, even the technology leaders themselves are cogs in this machine that all have vested interests in the status quo. Solutions that help them make money will be embraced before solutions that replace them. The technology for driverless cars is here today, but befor…"
  • Cougar
    CougarMarch 17, 2017"The elephant in the room is (in)vested interests. In getting a large number of banks to work together on an initiative larger banks often own stakes in the incumbent market infrastructure firms. While these banks own business or clients may acknowledge problems with the incumbents the bank's ownership stakes are an effective inhibitor to change or adoption. In part this article skirts around the core question: does bank strategic investment need to evolve from a profi…"
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** Note: Shallow depth of field

Buy-Side Tech Spend in Focus – Markets Media 

Full Article: Markets Media

According to a recent report from Greenwich Associates, institutions are allocating their increasingly scarce resources to fixed income pursuits and technology

Comments
  • Slider
    SliderMarch 10, 2017"5% YOY increase in spend allocation into technology is good but I fear that with rising rates and a more liquid/robust Fixed Income market, people may get comfortable again with business as usual leading them to be flippant regarding technological innovation. To realize the importance of technology in this market, participants have to see a clear increase in the bottom line or be exposed to products they simply can't live without like smartphones in the consumer space…"
  • Goose
    GooseMarch 10, 2017"Recognition that you need to increase spending on technology is a good start. I absolutely agree that your OMS is a good place to focus that increase. Slowly but surely, progress is being made in allowing asset managers to aggregate the information they want without needing the blessing of the data originator. The article states that the average buy side desk for comp and tech is $35.8 million. 3% growth split evenly among the two is a total of $538,000 for technology…"
  • Wolfman
    WolfmanMarch 10, 2017"I think the big story here is the focus on reducing the cost of terminals in order to allocate greater resources to other technologies like OMS. The 900 pound orange and black gorilla won't go away easily and will continue to develop added value to their user base. The ability for new technologies to develop solutions away from them isn't simply a technical question but a network question. Don't count them out just yet. What I would have liked to have learned from thi…"
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The Asset-Management Pressure Cooker – Bloomberg Gadfly 

Full Article: Bloomberg Gadfly

Behemoth investment firms, from Fidelity to Vanguard to BlackRock, are locked in fierce competition to attract assets, even if that means dropping their fees closer to zero. The result has been increasing strain, borne in large part by asset-management employees, who are being laid off or paid less.

Comments
  • Goose
    GooseMarch 3, 2017"Good points all. I would add govt intervention skewing fundamentals has made it harder to realize active mgmt gains.…"
  • Cougar
    CougarMarch 3, 2017"This article highlights some interesting asset management developments over the last few years: 1. The outcome of increasing correlation of markets & asset classes’ behavior - diminishing the attractions and ability of active funds to provide attractive returns over passive funds/structures - increasing the proportion of funds into trackers/ETFs. 2. Outright yields/returns diminished in most markets off the back of low central bank rates policy shining a spotlight…"
  • Viper
    ViperMarch 3, 2017"It seems like a pretty inevitable path but asset managers have enjoyed an unprecedented growth in assets and revenues for a while. Market rallied all around them and we went straight line tighter for the last 5-6 yrs. It is easy to say just use index funds. So perhaps the generic index following will be commoditized but skill in asset selection is a lot more important in times of increasing interest rates which is upon us so I wouldn't count active management out just…"
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The ETF Illusion: An Inside Look – Seeking Alpha 

Full Article: Seeking Alpha

As I’ve said more times than I care to remember, the problem with all of this is that when you stop using something, it invariably falls into disrepair. That disrepair, combined with the absence of banks willing to lend their balance sheet in a pinch, means there’s no liquidity for the assets that underpin these HY ETFs

Comments
  • Tried and failed.
    Tried and failed.February 25, 2017"I agree, the secondary market infrastructure for bonds (Corp & HY) is expensive, inefficient and in decline. Everyone knows that, whether they invest in individual bonds, mutual funds or ETFs. The secondary market actually profits from inefficiency, it will therefore never fix itself. You can measure the secondary bond market inefficiency by observing the H216 revenues for trading desks and platforms. That uplift largely represents the trading cost to investors. A…"
  • Sundown
    SundownFebruary 24, 2017"This has been a long topic of debate. I think there is some merit to the story, but I think ETFs are labeled as the problem when mutual funds have a much larger foot print and the same issues. The true underlying problem is the mechanics of the HY fixed income market. When times of stress occurs, nothing in that market flow smoothly. If the market has a false sense of security that the HY ETF is the magic bullet to the market during times of stress, I think they are m…"
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A Little-Known Startup Has Quietly Amassed 100,000 Wall St Users – Business Insider

Full Article: Business Insider

The aim is to become “the industrywide operating layer,” Mazy Dar said. Right now, OpenFin is typically delivered to a desktop together with an application that runs on it. The hope is that, in time, OpenFin will be on the desktop independent of any application, becoming a kind of finance application ecosystem of its own.

Comments
  • Jester
    JesterFebruary 17, 2017"I haven’t run into many people in our industry that really understand what OpenFin is and how it is supposed to make things easier. Let’s put it this way. Remember when most people used AOL for internet and about once a week they would get a CD to upgrade their service? Yes, you would have to constantly download new software just to get on to the internet. Crazy right? Now we just boot up the old computer and connect seamlessly. Well, this is what OpenFin may be able…"
  • Wolfman
    WolfmanFebruary 17, 2017"People used to say that Rodney Dangerfield was an overnight success story, even though he didn't make it in stand-up until he was in his mid 40s, even though he began writing comedy routines when he was 15! Ok, I'm a Dangerfield fan... His "I get no respect" became his signature line. OpenFin now has more than 100,000 users! They have been working on this vision for many years and are a group of talented, hard-working professionals. The idea that startups like OpenDoo…"
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IOSCO Research Paper on FinTech (Read Pages 37- 45) 

Full Article: IOSCO

Platforms and technology providers are increasingly focusing on identifying and matching firm orders(rather than quotes) and connecting all market participants (including buy-side to buy-side). “Information Networks” are developing where the emphasis is on identifying pools of liquidity rather than trying to create liquidity.

Comments
  • Wolfman
    WolfmanFebruary 10, 2017"Once again, features selected by the Friday Newsletter make this a must-read site. This is a comprehensive, neutral and easy to understand state of the state research piece. As a market geek, I was particularly impressed with the execution platform chapter and in the Challenges/Risks summary. I think the juxtaposition of fixed income to equities is spot on, but also believe that we are in the midst of a great transformation which will be characterized by fits and star…"
  • Slider
    SliderFebruary 9, 2017"Great piece! Lots of mention to MIFD II. Will be very topical in the upcoming year as banks have to sort themselves out by Jan 2018.…"
Burning house of dollars on a black background

Nasdaq to Overhaul its Fixed Income Trading Business – Financial Times

Full Article: Financial Times

Nasdaq has unveiled a radical overhaul to its under-performing fixed-income trading business, taking a $578m charge to end its eSpeed brand name and close its London futures venue. The US exchanges operator said that the impairment charge was because of a decline in operating performance and “a strategic change in the direction of our fixed-income business”.

Comments
  • Sundown
    SundownFebruary 6, 2017"If one remembers why Nasdaq bought eSpeed is because Bob Greifeld was betting (prematurely) on the volumes and volatility to return to the UST market and hence become a strong player in fixed income. He paid an absurdly high price for it (everyone thought so at the time) as we all know. The real problem was lack of business insight- the failure of Nasdaq to understand the changes in market structure. eSpeed's volume (at least 50%) was dominated by PTFs who extracted v…"
  • Goose
    GooseFebruary 3, 2017"I was always impressed with the sale price vs. the market share and instrument breadth of eSpeed. This is cuffing it, so perhaps a poster/reader has a more accurate depiction. At the sale, you had the treasury market, IDB market ~40% of volumes, eSpeed ~40% of that, trading mainly on the run treasuries, so 12 cusips? I see they are focusing on the off the run business, do they already have meaningful traction there, or is this a new push? It’s rare to get the better o…"
  • Wolfman
    WolfmanFebruary 3, 2017"This appears to be a full departure from the on the run treasury business, the largest and most electronic fixed market globally. For NASDAQ to abandon it and focus on the off the run market seems odd. With the expiry of the non-compete, BGC will likely enter the on the run market and try to regain some market share from BrokerTec. That said, John Shay is a capable leader and I'm looking forward to seeing what he does going forward. HL, great trade.…"
Money in dustbin isolated on white

If A Tree Falls in the Forest: Illuminating the True Costs of Corporate Bond Electronic Trading – ViableMkts

Full Article: ViableMkts

It is very surprising that as buy-side institutions laud corporate bond electronic trading, very few fixed income asset managers know the true details of their transaction costs. In other modernized markets like equities, asset managers must be intimately aware of transaction cost details for electronic trading for two crucial reasons

Comments
  • Stinger
    StingerFebruary 3, 2017"Great points, Merlin...really sobering.…"
  • Merlin
    MerlinJanuary 28, 2017"I really like Jester and Goose's comments (and I am sure I have taken shots at them before), they are spot on. I encourage the buy side to read their electronic trading vendor user agreements as my guess is 99% of those trading on them never have, and see what fees are disclosed. I think that you will be surprised to find out that with certain vendors there are no fees disclosed and no fee schedule provided. And also educate yourself as to what 'open trading' charges…"
  • Goose
    GooseJanuary 28, 2017"I was at a recent conference where I heard a buy side firm say "they wanted the incumbents to develop the better protocols they are seeing from new entrants". That gets a 100 on the laugh-o-meter. Yes, let me step right up and develop something that could erode my fat core business, acknowledge and compete in price and innovation with an upstart. As Jester noted, stop looking over your shoulder.. and look in the mirror.…"
  • Jester
    JesterJanuary 28, 2017"Let me give you readers the Fisher Price version of this article: There is no price competition for corporate bond electronic trading and this is costing the asset management community a TON in transaction fees. Why this is happening is a combination of laziness, arrogance, and more laziness. Just read this gem from Vanguard’s 2016 piece (Innovation and Evolution in Fixed Income Markets): “Focusing trading on a limited number of electronic venues, or aggregating trade…"
Stressed blindfolded bald man working on computer.

Pricing (Corporate Bonds) in the Dark – Risk Magazine (free download)

Full Article: Download Risk Article

Asset managers claim they have an information edge over dealers when it comes to (corporate) bond pricing. How are sell-side players countering the threat?

Comments
  • Slider
    SliderJanuary 20, 2017"I think the buy-side is also scarred by what happened in 2008. They understand now that given the evolving regulatory environment, they don't ever want to be beholden to dealers for liquidity. And why should they be at this point given they hold more of the bonds and have better price discovery? Dealers were always banking on the opaqueness of the OTC market to make money and that model is no longer viable given the push to transparency. Depending on the nature of the…"
  • Goose
    GooseJanuary 20, 2017"Risk takes up the mantle on a critical liquidity topic that hasn’t gotten much coverage. Dealer price discovery continues to diminish to the detriment of the dealers, and just as importantly, to the buy side. While the buy side can opportunistically provide liquidity, I believe it is a pipe dream to think they will become truly significant players in immediate risk transfer. The more markets evolve electronically, the more important the market makers become. Ask the e…"
  • Wolfman
    WolfmanJanuary 20, 2017"Information was not at the core of the dealer-as-market-maker model - capital was. In the vacuum left by persistently low rates and regulatory restrictions on capital at risk, the buy-side is engaging as price makers. Rates aren't skyrocketing and risk tolerance may increase somewhat, but the reality is that if dealers can't make money making markets, they have no incentive to do so. I think the most interesting part of the report was that the buy-side starts with a p…"
  • Cougar
    CougarJanuary 20, 2017"I agree with Viper's points. We know the sellside is starving secondary trading of balance sheet for years because the business was not economically viable from capital costs, and more recently increased information asymmetry biased to the buyside etc. Banks now recognize this and better need to control their information. The buyside needs the sellside as its insurance policy not for the 95% of time but the 5% when the buyside price makers and sellside market makers a…"