Financial Economists Roundtable – Statement on the Structure of Trading in Bond Markets
May 21, 2015 \
6 Comments
The Financial Economists Roundtable believes that an order display requirement in the fixed income markets would substantially improve market quality for retail and institutional investors alike. FER urges the U.S. Securities and Exchange Commission (SEC) to improve bond market efficiency by simply requiring brokers to post their customers’ limit orders to an electronically accessible broker platform or alternative trading system, where one customer’s limit order could trade against another customer’s order without dealer intermediation.
Comments
There’s just so much in this one sentence to deal with: “The U.S. Securities and Exchange Commission (SEC) could rapidly and substantially improve bond market efficiency by simply requiring brokers to post their customers’ limit orders to an electronically accessible broker platform or alternative trading system (ATS), where one customer’s limit order could trade against another customer’s order without dealer intermediation.” That’s it, that’s the ticket. Get rid of the dealer and we can all trade with each other. I always find it amazing that a collection of the illuminati can come together and conclude that the only real solution… Read more »
So the FER want to mandate dealer disintermediation. Great – There are unintended consequences of regulation. Turnover in the corporate bond market is down 48% since 2007 and, it has been reported that bid / ask spread has doubled since Basel III was implemented. News flash – dealers are not required to participate in non-profitable lines of business. See CIBC’s recent departure.
The Goose sees some validity to the overarching concept presented here. A lit open access market will accomplish the majority of the benefits stated. The key question is, “What in the corporate/municipal universe is going to trade on a lit, open access market? to gain these benefits. The characteristics of the security, and the risk associated with displayed price into an unknown crowd are key. Looking at what trades actively on other order book markets, you will get large, better credit issues…decent liquidity profile and comfort around credit risk. However, the unknown crowd creates adverse selection risk for a supplier… Read more »
The FER makes the following assertions: “The U.S. Securities and Exchange Commission (SEC) could rapidly and substantially improve bond market efficiency by simply requiring brokers to post their customers’ limit orders to an electronically accessible broker platform or alternative trading system (ATS), where one customer’s limit order could trade against another customer’s order without dealer intermediation.” “…an order display requirement in the fixed income markets would substantially improve market quality for retail and institutional investors alike.” They also state “Dealers would remain important in these markets because for many bonds, buy-side traders are rarely on both sides of the market at… Read more »
I believe (but don’t quote me) the crossing levels in equity’s is something like ~7%. Map that across to the corp bond market and you can take an educated guess that this will not substantially fix the liquidity issue. A study by a neutral party on this across US / Europe / Asia individually would aid regulators in understanding the issue more clearly rather than relying on what works for 1 market must work for all. Most dealers have spent a great deal of time cleaning up their balance sheets and getting themselves into a situation were they can aggressively… Read more »
I am familiar with and respect the work of several of the professors who have signed on to this recommendation. That said, I wonder how they could be so blind in making it. They are so wrong in so many of their assertions, it would take hours I can’t spare to correct them all. Let’s de-construct just one notion: the idea that the combination of a Treasury security and common stock is comparable to a corporate bond, and since we have limit orders in Treasury securities and common stock, we should be able to have limit orders in corporate bonds.… Read more »
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