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Dear Buy-side. You seem very concerned about liquidity. Can I suggest paying for it? – Bull Market

Dear Buyside

There’s no law of the universe which says that a higher capital requirement for inventories should mean that banks stop wanting to be in the business of bond trading. What ought to happen is that, if the capital requirement is higher, pricing should go up, in order to cover the cost of the larger capital requirement.

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Comments
  • Goose
    GooseJune 8, 2015"A lot of great points here, many of which touch on market participant's classic tug-of-war between short term and long term incentives. If a participant believes there is a potential problem, who in a production seat on either side is incentivized to change anything in the short term? Is management willing to attempt a different long term strategy, at the risk of short term downside..and are they willing to push that path down the org chart? There certainly has been a…"
  • Merlin
    MerlinJune 6, 2015"All great comments. I never thought of the issue as one of 'immediacy' but it resonates with me. Please note that my comments really are focused on the corporate bond market, after all, this is the Corporate bond Friday Newsletter. The way I always looked at it is that there is plenty of liquidity, the buy side just doesn't like the price of that liquidity and I think the article and comments all deal with this in a variety of ways. I am sympathetic to the author of t…"
  • SliderJune 5, 2015"Good article, but in almost every discussion about liquidity, the same problem appears: everyone's talking about it, and no one is actually explicating it. 1) If I buy a house with (almost) no money down, did I provide liquidity to the seller? 2) If as a yacht dealer I use my warehouse line to purchase a boat from the manufacturer, did I provide liquidity to the seller? 3) If I use my savings to buy a mortgage note from a bank, did I provide liquidity to the seller? 4…"
  • Hollywood
    HollywoodJune 5, 2015"Ther unintended consequences of new regulation has crimped the ability of the sell side to provide liquidity in secondary corporate bond. Sundown accurately states of the buy side: “However, their largest influence has been to force the sell-side and independent third parties to come up with solutions such as building venues that could be helpful going forward.” Liquidity is not an entitlement. New liquidity can’t just materialize. The institutional buy side (who own…"

The Simple Reason Why Everyone Wants New Corporate Bonds – Bloomberg

Bloomberg article

Citigroup credit strategist Jason Shoup estimates that investors can add 20 basis points of alpha, as measured by annual excess returns, to their portfolios just by purchasing new-issue bonds. In a world of low and even negative interest rates, that is a not insignificant opportunity and it’s one that investors have been eager to take advantage of in recent years.

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Comments
  • Sundown
    SundownMay 29, 2015"When reading this article, there is nothing here that is enlightening to a professional who has spend time around the corporate bond syndicate desks on Wall Street. The new issue process is one that is analogous to that of horse trading at a state fair. Desk managers converse with each other across firms as to how a deal should be allocated, salespeople and their colleagues "barter" to get the best allocations to their favorite clients (in rank order) and investment m…"
  • Merlin
    MerlinMay 28, 2015"I don't know what percentage of corporate bond AUM are held by the top 10 asset managers so a 45% allocation of the Verizon deal to them (in the related/referenced article) may be in line or not. What I think we can all agree on is that different buy side accounts get treated differently by different 'underwriters' (can you call them that any more?) for a variety of reasons allowing for quid pro quo's and other sorts of game playing. What is clear is that small instit…"
  • SliderMay 28, 2015"If this is true--if, that is, asset managers commonly and profitably game the BIG index construction practice--then what good does it do them? Won't substantially all of them outperform by whatever the gaming premium is, and then settle out into various performance quintiles, just as they would without the gaming? And wouldn't their investors realize that the alpha is chimerical? This may play some role in corporate bond issuance, as the author suggests, but to mentio…"
  • Wolfman
    WolfmanMay 28, 2015"I hope Tracy Alloway is reading these newsletters because I really want to help her. Let's break this down simply. It seems as though her point is that the Corporate Bond market is controlled by the underwriters who pay back big buy side firms with the initial offering of the bonds. This results in a 20 basis point built-in profit since the bonds are then sold at an initial premium in the secondary market. I've always thought that you didn't make or lost money unless…"

Financial Economists Roundtable – Statement on the Structure of Trading in Bond Markets

FER logo

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.

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Comments
  • SliderMay 28, 2015"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…"
  • Iceman
    IcemanMay 25, 2015"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 cleanin…"
  • Merlin
    MerlinMay 23, 2015"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 m…"
  • Goose
    GooseMay 22, 2015"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…"

BCG Report – Adapting to Digital Advances: Global Capital Markets 2015

BCG

(BCG Report)

Digital innovation is allowing new value propositions to emerge in sales and trading.

Download BCG PDF

Comments
  • Hollywood
    HollywoodMay 21, 2015"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.…"
  • Sundown
    SundownMay 18, 2015"There are very few times that I read a report like this and cannot find someway to critically pick it apart. There is virtually nothing in this report that isn't directly on target in my opinion. One of the best pieces in terms of research and context I have seen that properly explains the intersection between technology, regulation, bank financial reporting requirements (and shareholder demands) with the current market structure. This piece appears to be the best so…"
  • Merlin
    MerlinMay 16, 2015"Agreed, fine paper, and a lot to digest, but the underlying theme of leveraging technology and digital advances has been in vogue for years. Bringing additional focus always helps, but much of this paper only partially applies to the subject of this weekly newsletter, Corporate Bonds. Some of the statements and points throughout just don't apply to the Corporate Bond market. One example; there is discussion of an information shift that has occurred giving clients an a…"
  • Wolfman
    WolfmanMay 15, 2015"This paper forces us to give real thought to the market structure and the structure of the market participants. Is technology going to solve the problems of raising capital and transferring risk that the CMIBs currently solve? What do I mean by this? Does the CMIB repreasent a condition in which an entity is put in place to serve multiple purposes because the technology doesn't yet exist to do so without that entity in place? Does the digital transformation of the ind…"

Bankers and Regulators Voice Fears on Bond Market Volatility

Barney Frank

(DealB%k – Peter Eavis)

Those voicing such fears say that recent changes in the bond market could change the way that Wall Street banks, large bond funds and trading systems would behave in a period of turbulence. Other developments have left the market vulnerable, they say. A huge rally in bond prices over the last several years, stoked by vast amounts of monetary stimulus by central banks, may have made the market vulnerable to a sharp sell-off.

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Comments
  • Sundown
    SundownMay 11, 2015"The question posed at the end of the article is really the starting point. The bottom line, is investors have had the luxury of knowing that the banks will always be there to step in to take risk in times of need because the dealers have enjoyed the luxury of cheap leverage over the years. I guess my questions in response would be “Is it a god-given right for an investor to not bear the actual market risk of the security they are buying? Should they simply just be res…"
  • Iceman
    IcemanMay 10, 2015"What is interesting is what is not being said. When redemption's start happening there will be a list of assets that will have liquidity however this is likely to be far less as a proportion to the total amount of cash required. In short if a fund manager wanted to sell 50% of his portfolio to meet redemption's it is likely he will only get prices on a small proportion of the assets as dealers balance sheets have changed which is a direct impact from regulation. The s…"
  • ViperMay 9, 2015"Bond market liquidity gets more focus instead of the size of the asset manager's assets versus the street's capital. The street still has a tremendous commitment and incentive to participate in both the US Treasury/government markets and spread products, but is now fully aware that when the asset managers need liquidity it makes no sense to step in front of that train. Other than the occasional flash crash, asset manager's growth and size is not so much the culprit bu…"
  • Wolfman
    WolfmanMay 8, 2015"Where do I begin? Market vulnerability? The street acting in it's own best interest? Perhaps the government acting in its own self interest? If we look at the 10-year note yields from 1945 to 2015, you see a beautifully drawn image of Mount Everest, with the peak sometime around August 1981 with a yield higher than 14.5%. As rates began to rise, the market relied on what it knew best and predicted many time along the way that 6, 7, 8, 10 or 12% would likely be the pea…"