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Confessions of an All to All Advocate – Larry Fondren (TABB)

ConfessionI confess that the results of the research caused me, despite my advocacy of all-to-all trading, to realize that a dealer-centric trading environment should continue to be the cornerstone of the fixed income market. FULL ARTICLE

Comments
  • Merlin
    MerlinJanuary 9, 2016"Thanks Larry. I think it would be helpful to know how the negotiations actually occur within the digital DelphX netowrk. i mean, how does one communicate that I would like to have an order on 25mm of xyz bonds at z spread (i guess could be at current mkt levels or through, no?) in return for providing you with a 'double allocation' on the next deal of your choice up to xx million in par value? These types of things today, like I will pay 3 bps through the market to bu…"
  • Larry FondrenJanuary 8, 2016"Merlin - I don't have a problem with your assessment that a pending transaction for which all terms have been agreed, but has not yet been executed, could also be considered as a "firm order" that has been mutually structured between the potential counterparties. That said, it seems to be a matter of semantics resulting in a distinction without a difference. As to the question of context, the pending trade ("firm order") will have been confidentially negotiated betwee…"
  • Merlin
    MerlinJanuary 8, 2016"How do you have a 'trade' that is 'not a trade'? If the dealer can decide not to execute it then it was never a trade but a firm order for a set period of time that cannot be canceled by the buy side. Are you envisioning these 'trades/orders' to be within the context of existing quotes/markets or away from the market? i am assuming away given the time frames you mention. And the concept of a buy side account getting favored pricing or new issue allocations doesn't sou…"
  • Larry FondrenJanuary 8, 2016"No. It is an asset manager (or another investor) negotiating with a given dealer the terms of an immediately executable trade while concurrently negotiating the terms of a binding contract that: 1) postpones execution of the trade for a specified period of time; 2) enables the dealer to unilaterally lift the postponement during a specified period; 3) records the incentive(s) the dealer will convey to the investor for postponing the trade; 4) places the pending trade i…"

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13 Comments on "Confessions of an All to All Advocate – Larry Fondren (TABB)"

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Wolfman
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This is a lucid, well thought out and intelligent article, but I’m not certain I’m convinced. Mr. Fondren proposes that a “dealer and investor negotiate the terms of a future transaction in which the dealer will buy or sell a specified amount of a security at an agreed price within a set time period. The dealer and investor then agree to place the pending transaction in a secure cache administered by DelphX. The dealer can then release some or all of the pending transaction during the agreed period – facilitating its ability to again source immediate OTC market liquidity.” It… Read more »
Larry Fondren
Guest

Wolfman – Thank you for your considered skepticism (and for the chance to revisit a favorite line from My Cousin Vinny). What may not have been clearly conveyed in the article is the fact that the “Inventory” that is contractually cached/secured by the dealer includes not only the deployable market supply (a cached dealer Buy), but also the deployable market demand (a cached dealer Sell) it requires to intermediate continuous OTC liquidity, even in times of stress. Thus, when most are running for the door, the dealer holds the offsetting cached demand required to reliably provide immediate on-demand liquidity.

Stinger
Guest

While a thoughtful potential addition to market structure for certain trades that warrant the time/negotiation that this would seem to entail, I have trouble seeing how this doesn’t violate accounting principles, not to mention FINRA rules regarding trade dissemination.

Larry Fondren
Guest

Chipper – Thank you for your considered insight. The accounting principles and FINRA rules to which you refer wouldn’t apply to a pending transaction that has been postponed to create a deployable Cached Inventory in the subject issue, as no trade has yet occurred (and may not ever occur). Accordingly, no accounting event has occurred and no trade can be reported to FINRA TRACE.

Stinger
Guest

So would you describe it as an asset manager setting some positions as “available to trade” and committing them to a certain dealer, but no trade has been agreed on?

Larry Fondren
Guest
No. It is an asset manager (or another investor) negotiating with a given dealer the terms of an immediately executable trade while concurrently negotiating the terms of a binding contract that: 1) postpones execution of the trade for a specified period of time; 2) enables the dealer to unilaterally lift the postponement during a specified period; 3) records the incentive(s) the dealer will convey to the investor for postponing the trade; 4) places the pending trade in a Cache created and maintained by DelphX for its safekeeping; and 4) causes any portion of the postponed trade remaining in the Cache… Read more »
Goose
Guest
This is an interesting concept, but I can’t fully evaluate it given the operational, regulatory, fiduciary, and trade economics questions I have. I checked the website but didn’t find much more detail around the process…am guessing due to its proprietary nature. From a simple workflow perspective, would this require the buy side to alter their behavior by having a dynamic daily list of bonds they would sell and buy at certain levels, which would need constant price and size adjustment based on daily market moves and the daily natural buy and sell flows available? I see dealer quotes are planned… Read more »
Larry Fondren
Guest
Goose – Thank you for your interest and questions. The DelphX network is structured to offer dealers and investors a variety of protocols by which to confidentially (and, if they choose, anonymously) communicate their potential interest(s) and preference parameters, and to negotiate immediate and pending future transactions without information leakage. Investors can thus confidentially indicate their active and latent transaction interests (either directly or indirectly through their custodian) and gain access to new sources of alpha by discreetly providing cached inventory supply and demand to dealers. To optimally balance price transparency and liquidity, executable “Level 1” quotes from all dealers… Read more »
Merlin
Guest
Lets start with the first sentence before we get to the real topic…”Despite the benefits offered by all-to-all….electronic trading platforms…”….Maybe just my bias but Larry it sounds to me that you really haven’t given up the feeling that all to all isn’t the right solution, just that market participants dont know whats best for them. Regarding cached inventory. I see you have replied to some others postings already so I have a few questions for you and then i will try and comment further. You state, “A dealer and investor negotiate the terms of a future transaction in which the… Read more »
Larry Fondren
Guest
Merlin – Thank you for your interest and comprehensive questions. First let me clarify that, while I believe all-to-all trading is certainly viable for smaller-sized trades of standardized issues, it is clearly not the trading forum currently preferred by most market participants for larger transactions involving non-standardized issues (and I believe THEY “know what’s best for them”). Accordingly, we’ve structured the DelphX network as a dealer-to-investor and dealer-to-dealer communication environment, with no facility for investor-to-investor or all-to-all interaction. As to Cached Inventory, the feedback we’ve received from dealers and investors indicates most caches will be structured for periods ranging from… Read more »
Merlin
Guest
How do you have a ‘trade’ that is ‘not a trade’? If the dealer can decide not to execute it then it was never a trade but a firm order for a set period of time that cannot be canceled by the buy side. Are you envisioning these ‘trades/orders’ to be within the context of existing quotes/markets or away from the market? i am assuming away given the time frames you mention. And the concept of a buy side account getting favored pricing or new issue allocations doesn’t sound like it would pass the smell test. More ” I scratch… Read more »
Larry Fondren
Guest
Merlin – I don’t have a problem with your assessment that a pending transaction for which all terms have been agreed, but has not yet been executed, could also be considered as a “firm order” that has been mutually structured between the potential counterparties. That said, it seems to be a matter of semantics resulting in a distinction without a difference. As to the question of context, the pending trade (“firm order”) will have been confidentially negotiated between a dealer and investor within the digital DelphX network in a manner consistent with the process OTC trades have long been negotiated… Read more »
Merlin
Guest
Thanks Larry. I think it would be helpful to know how the negotiations actually occur within the digital DelphX netowrk. i mean, how does one communicate that I would like to have an order on 25mm of xyz bonds at z spread (i guess could be at current mkt levels or through, no?) in return for providing you with a ‘double allocation’ on the next deal of your choice up to xx million in par value? These types of things today, like I will pay 3 bps through the market to buy bond A in order to sell you bond… Read more »
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