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Why FinTech is Hard: Lessons from the CEO of BondCube – Huy Nguyen Trieu

 

hard work 4

Paul Reynolds, the founder and CEO of Bondcube, very kindly accepted to share what he went through and this is invaluable insight for anyone interested in FinTech today. 

Full Article

Comments
  • VIPERSeptember 9, 2015"If history is to repeat itself again, keep in mind three factors are likely to determine which platforms will survive and thrive over the next 3-5 years 1.) Access to much more capital than the initial business plan indicated. It takes years to build, and nurture the network, much less monetize it as Hollywood suggests. 2.) Anchor tenants. Having network participants with a strong financial incentive to use and support the platform helps tremendously in the early days…"
  • ViperAugust 28, 2015"Paul has joined a long list of aspiring entrepreneurs who have donated time, money, and ideas into the gutter of corporate bond electronic solutions debris. We are in a different time than those early pioneer days where the first piles of debris started collecting. It seems the lessons we are relearning are very clear. the buyside is voicing its desire for progress, alternatives, enhancements etc etc yet behavioral change is both very hard and perhaps not all that nec…"
  • Goose
    GooseAugust 28, 2015"Wolfman, interesting comments on regulation. From Paul's experience, seems the fixed cost carries a pre launch funding barrier to innovators, and a moat for the incumbents. So, will regulators impose more regulation to overcome the barrier of regulation? As noted US equity markets did. From a light perusal, it seems MIFID II rules would lower the barriers for a platform to have their quotes, IOI's etc, displayed and respected. Would be interested to hear someone's per…"
  • Wolfman
    WolfmanAugust 28, 2015"What a great opportunity for all of us to have Paul share his insights into the challenges he faced, and to his credit, where he thinks he failed. We are in an industry where the incumbents have a distinct advantage and any innovation that challenges the status quo faces tremendous challenges. I think Chris's choice of Sisyphus was a perfect meme for this article. However, and this is where I think we really need to dig deeper, is understanding that any company, incum…"

We Still Need Someone to Talk To – Best Execution

Two women gossiping in studio (B&W)

More complex trades and less liquid instruments are still voice traded – FOW estimate that 50% of U.S. government bonds and 80% of credit markets and corporate bonds are still traded telephonically. Although advances in technology and regulatory pressures will drive increased electronification, there will always be a place for voice.  FULL ARTICLE

Comments
  • Peter ClassenAugust 26, 2015"We should dig a little deeper into Darwin's Origin of Species Theory. If we understood it better, it might indeed help us answer the fixed income future-of-trading question. Darwin's theory is not that organisms (even traders) evolve to a high order, achieve greater efficiency, or become stronger. His theory is that in a population filled with individuals each having slight variances (think: different trading protocols and exchange features), the individuals best suit…"
  • Goose
    GooseAugust 20, 2015"I do think the article is stating the obvious, but given the mania over e trading and liquidity, it’s a nice timely reminder of reality. The most liquid electronified markets in the world still have large human interaction and intervention in the trading process. As the more heterogeneous FI markets evolve electronically, low hanging execution fruit may disappear, but the high touch OTC opportunities generated by an electronic ecosystem will be numerous. Do the latest…"
  • Hollywood
    HollywoodAugust 20, 2015"Cumberland states: “Celent has estimated that over 50% of buy-side fixed income trading will be electronic by the end of the year.” This is no great revelation based on the fact that many fixed income segments are already there. For example a large Dealer estimates the US percentage of electronic trading, by sector, as follows: CDX 98%, Interest Rate Swaps 60%, US Treasuries 55%, Agencies 30%, US IG Corporates 22%, US HY Corporates 8%, and Single Name CDS virtually no…"
  • Sundown
    SundownAugust 20, 2015"Mr. Cumberland’s comments are on-point, the more complex the instrument, the more human action is needed. Anything generic, including strategy, can be provided most efficiently via machine. What cannot be ignored is that while people will always be a firm’s most valuable resource, it is also a comparatively expensive one. Humans will be needed to either run the machines, sell more complex (and relatively higher margin) products and maintain important client relationsh…"

Bond Managers ‘Nervous’ About Banks’ Role in Liquidity Projects – Investment Week

A fisheye image of a nervous business man biting his nails.

Fixed income managers agreed that any moves to boost liquidity are welcome, they fear the open information within these projects could leave markets vulnerable to price fluctuations. Full Article

Comments
  • CharlieAugust 14, 2015"Thank you Iceman for a few specifics on Neptune, the article certainly didn't advance my understanding and it seems a few people quoted in the article don't understand it either. Neptune has a an education challenge on its hands. Is it it just me, when I read the words 'non profit' and x banks, y buyside owners etc etc., I yawn and think this is going nowhere fast; too many conflicting interests and agendas, too tough to get decisions made, and most importantly no pro…"
  • Iceman
    IcemanAugust 14, 2015"This article is one of the weirdest (and that's saying something) pieces I have read in a while. As per below Merlin is spot on but to answer some of the questions raised. -“Money managers like me are nervous about going into the system and announcing our intention to buy and sell.” Are we all sure that there is even such functionality in Neptune? Answer = No. In its current form it is Sell Side to Buy Side mirroring in a more cost effective, and higher quality format…"
  • Sundown
    SundownAugust 13, 2015"Wow, I don't have a huge amount to add to Merlin's detailed analysis. The main things one has to understand when building a new platform addressing market structure problems are the following; (1) It cannot address all the problems- in other words it has to be adequate, not perfect (2) It has to be better than what presently exists, filling a need (3) It has to have flexible protocols that can evolve, (4) It has to be easy for all players to connect to (5) It has to a…"
  • Hollywood
    HollywoodAugust 13, 2015"Merlin - Well Stated! My understanding is that Neptune simply replicates the existing dealer to client work and, simply adds connectivity efficiencies.…"

Big Benchmark Bonds: Dream or Reality? – Hedges Associates

Big Benchmark Bonds: Dream or Reality? - Hedges Associates 

The question that begs to be asked is: Could we enhance the corporate bond picture by reducing the number of issues outstanding, concentrating trading activity and thus increasing ‘liquidity’?

Full Article 

Comments
  • Wolfman
    WolfmanAugust 9, 2015"There will be a version of this dream that will come true, but it will take time and technology to accomplish. Technology is changing and challenging every industry and there will be new products that expand capital creation; we'll just have to keep working on it. BTW, I think Mr. Hedges is helping to lead the thought process on this one!…"
  • JesterAugust 8, 2015"Absolutely a dream, and the author touches on exactly the reason why: " Frequent issuers may present some opportunity for larger issues, if investors offer them sufficient incentives and don’t simply expect them ‘to do the right thing’ as ‘custodians of the market’ or jump for the promise of ‘cheaper borrowing rates tomorrow’.".....There is nothing motivating eligible issuers to accommodate the benchmark request. This type of change in behavior requires large incentiv…"
  • Merlin
    MerlinAugust 6, 2015"The answer is 'Dream'. When large investors go to large issuers and offer to buy a ginourmous issue or re-opening at a premium to market levels, then maybe 'reality'. As likely as pigs flying.…"

Bear Markets and the Wisdom of Ages – Chris Ferreri (Eight Point Strategies)

grizzly-bearAs I approach the end of one decade and the beginning of another, I realize that I have found historical context has served me well in understanding how I might behave in almost any given circumstance.  While this personal perspective may prove useful, by its very nature it is personal and is limited by my own experiences. With this in mind, I’ve come to rely on the web to deepen my personal knowledge as well as learning from others.  The wisdom of age combined with an appreciation for information technology and respect for informed viewpoints can be very powerful.

For some perspective, the market has experienced a 3-decade bull market in bonds which was preceded by a severe bear market of rising rates to battle inflation. Armed with the knowledge of modern analytics, I asked the omnipotent web gods a simple question; “what were bond fund outflows in 1980?”

The query returned a number of results, but the one that I found most relevant was a paper published in the FRBNY Economic Policy Review of July 1997 entitled  “Market Returns and Mutual Fund Flows” written by Eli M. Remolona, Paul kleinam and Debbie Grunstein.

I’ve selected sections that I thought were more relevant to the current dilemma and offered them for your review below.  What I found most helpful in presenting a visual representation of their research as data analysis is Chart 7 on page 13.  This is a representation of the relationship between market declines in mutual fund liquidity ratios as measured by fund managers’ reactions.

Here’s the chart:

Chart

This is the summary of fund managers’ reactions to market conditions:

FUND MANAGERS’ REACTIONS

“Fund managers may react sharply to abrupt market declines and thus could exacerbate the effects of the outflows.  For instance, to meet redemptions, they may either draw on their funds’ liquid balances or sell off portions of the portfolio. Or they may go further still by selling more securities than they need to meet the redemptions.  Indeed, in four of the five episodes summarized, average liquidity ratios rose in the month of the market decline, indicating that the fund managers sold more than they needed to meet redemptions (Chart 7). In three episodes, the liquidity ratio continued to rise in the following month. Nevertheless, the reactions of fund managers fell well short of a panic. Faced with heavy redemptions and the possibility that current outflows could lead to more outflows in the near future, the fund managers took the reasonable step of adding to their liquid balances. Moreover, in the five episodes of market decline, the average liquidity ratio never rose by more than 2 percent of net assets and never exceeded the highest levels reached in periods without major market declines.”

Is it really different this time or are we simply looking at the abyss and afraid of the implications of a bear market?  To save you from reading the entire paper, I have outlined some of the key sections that illustrate previous reactions to major market moves…..you are welcome.

THE EFFECT OF MAJOR MARKET DECLINES

“To characterize the effects of market returns on mutual fund flows, it is important to examine whether large shocks have special effects. Our instrumental-variable analysis assumes that the effects on flows are proportional to the size of the shocks. We now assess this assumption by taking a closer look at mutual fund flows during five episodes of unusually severe market declines (Table 7).   We also look for evidence that the flows perpetuated the declines. The market declines were most pronounced in the bond market in April 1987 and February 1994, in the stock market in October 1987, in the stock and high yield bond markets in October 1989, and in the municipal bond market in November 1994.  Although these were the markets most affected, price movements in other markets also tended to be significant; therefore, we also take these markets into account. Finally, we examine whether the funds’ investment managers tended to panic and thus exacerbate the selling in the markets.”

THE BOND MARKET PLUNGE OF APRIL 1987

“In the spring of 1987, Japanese institutional investors pulled out of the U.S. stock and bond markets after the threat of a trade war between the United States and Japan precipitated a sharp dollar depreciation (Economist 1987).  In April, government bond prices plunged an average of 2.3 percent, while stock prices and other bond prices also fell. Taking into account the decline in the government bond and stock markets, our instrumental-variable estimates would have predicted unexpected outflows from government bond funds of 1.2 percent of net assets.

Actual unexpected outflows were 1.8 percent, much greater than predicted but still bearing little resemblance to a run. Although there is some evidence that the flows served to perpetuate the decline, the magnitudes were still too small for a self-sustaining decline. In May, the unexpected outflows from government bonds rose to 2.9 percent of net assets, while bond prices continued to fall. However, flows and prices recovered in June.”

THE BOND MARKET DECLINE OF FEBRUARY 1994

“In February 1994, the Federal Reserve raised its target federal funds rate 25 basis points. The increase, the first in a series, was not altogether a surprise, but prices of government bonds still fell by about 2.1 percent. Stock prices also fell.  Given these developments, we would have predicted unexpected outflows from government bond funds of 0.8 percent of net assets, an estimate that is close to the actual figure of 0.9 percent. Unexpected outflows rose in March and bond prices continued to decline, but the magnitudes remained unimpressive. Prices started to stabilize in April.”

THE MARKET DECLINES OF NOVEMBER 1994

“In November 1994, the Federal Reserve again raised its target federal funds rate—this time by 75 basis points, a larger increase than most investors had anticipated. In addition, the troubles of the Orange County municipal investment pool came to light later in the month. Stock and bond markets experienced substantial declines, with municipal bond prices falling by 1.4 percent during the month. Taking these market movements into account, we would have predicted unexpected outflows from municipal bond funds of 1.2 percent of net assets, yet actual unexpected outflows were 1.4 percent. The inflows in December exceeded the outflows in November.”

FUND MANAGERS’ REACTIONS

“Fund managers may react sharply to abrupt market declines and thus could exacerbate the effects of the outflows.  For instance, to meet redemptions, they may either draw on their funds’ liquid balances or sell off portions of the portfolio. Or they may go further still by selling more securities than they need to meet the redemptions.  Indeed, in four of the five episodes summarized, average liquidity ratios rose in the month of the market decline, indicating that the fund managers sold more than they needed to meet redemptions (Chart 7). In three episodes, the liquidity ratio continued to rise in the following month. 

Nevertheless, the reactions of fund managers fell well short of a panic. Faced with heavy redemptions and the possibility that current outflows could lead to more outflows in the near future, the fund managers took the reasonable step of adding to their liquid balances. Moreover, in the five episodes of market decline, the average liquidity ratio never rose by more than 2 percent of net assets and never exceeded the highest levels reached in periods without major market declines.”

CONCLUSION

“To the extent that the effects of returns on flows are present, they seem to be stronger for the funds with relatively conservative investment objectives, such as government bond funds and income stock funds, than for those with relatively risky objectives, such as growth stock funds, GNMA bond funds, and high yield bond funds. We also find that these effects have been stronger in certain episodes of major market declines, although still not strong enough to sustain a downward spiral in asset prices.”

Like I said, the wisdom of age combined with the internet and respect for informed viewpoints can be very powerful. Perhaps the next time you hear someone proclaim to know the dangers of the next market crisis, you should ask them to SHOW THEIR WORK.

Chris Ferreri

Eight Point Strategies

Comments
  • Merlin
    MerlinAugust 1, 2015"Thanks for this Chris. I find it enlightening yet unsurprising. It seems to provide credence to the long held view by many that the corporate bond market is a one way market with a herd mentality and people always seem late to the party, which is likelywhy you found the overselling you did in your research.. Issuers fill the void when there is no secondary market sellers and this is why spreads tend to gap out (sorry, dont have evidence to share!) During periods of se…"
  • CharlieJuly 31, 2015"A very interesting perspective. It is always useful to see 'what happened' last time. If we look hard enough we will usually find some relevant data. Thank you for sharing Chris.…"

What No One Ever Says About Bond Market Liquidity – Bloomberg

piggly-wiggly-logo

All these solutions miss the point, however. None focus on the real reason behind deteriorating liquidity, which is that vast swaths of the corporate bond market have simply been cornered.   FULL ARTICLE

Comments
  • Sundown
    SundownJuly 31, 2015"I agree with Merlin regarding the ugliness of the articles coming out from the mainstream press. The largest players have been doing this for years, it's no secret to anyone involved in the process. There have been many notable examples- large mega-deals in the early 2000's and the issuance of the bank debentures as a result of the funding of the system immediately post- crisis are just two. Large asset managers continuously strong-armed the dealers in giving them a d…"
  • CharlieJuly 31, 2015"Benchmarks and 'Fixes' continue to encourage greedy behavior, but never irrational! This time its all about pursuing Alpha that is really fictitious as the Alpha gained is purely about timing. Should the market structure conversation be extended to cover new issue procedures? There are plenty of auction platforms available that would provide an open transparent process ensuring issuers got the best possible deal. The auction idea is far from original I believe GS had…"
  • Goose
    GooseJuly 31, 2015"In the current conversation, the market making community has been the favored whipping boy for the media when talking about liquidity in the markets. It’s good to see an article focusing on a very large piece to the puzzle. Blackrock’s viewpoint paper proposals have had a “white knight” feel to them, but their behavior is a large part of the issue. Broadening the conversation around the role the buy side is playing will help to temper opinions, and form more equitable…"
  • Merlin
    MerlinJuly 30, 2015"Cornering. These articles are getting uglier and gloomier. Is it possible that Blackrocks paper can now actually be interpreted as a self serving act of desperation as they try to figure out how they are going to untangle themselves from the mess they have helped create? They are the biggest fish in a shrinking pond of liquidity...what are their choices but cry for help for the 'good of the market'? Writing a paper is a nice way to try and harangue others into helping…"

Debt Traders Could’ve Bought Millions of Apple Watches With Loss – Bloomberg

elephant-in-the-room-e1375510078440

“It’s Bond Math 101,” especially for Apple’s record-breaking $17 billion of bonds sold in 2013, right before benchmark yields rose, said Jody Lurie, a corporate-credit analyst at Janney Montgomery Scott LLC in Philadelphia. “When rates rise, there’s only one way to go, at least prior to it going to maturity, and that’s down.”

Full Article

Comments
  • Goose
    GooseJuly 23, 2015"There are some very interesting points in the comments on the retail angle of individual bonds vs. funds and ETFs. Who knows individuals that own FI ETF's? Raise your hand. An investor considers the process of buying, owning, and potentially selling an individual bond. Things to think about. Individual credit risk, examining what pre and post trade transparency (some executions with markups and markdowns) exists, the potential process around selling it, statement mark…"
  • Wolfman
    WolfmanJuly 23, 2015"So, take a look at this and let me know if this chart indicates a good time to be buying bonds. The market structure of the last 35 years has been formed around a bull market in bonds and raised a generation of traders who traded from net long positions. Yes, I know I'm over simplifying this, So, take a look at this and let me know if this chart indicates a good time to be buying bonds: http://s.wsj.net/public/resources/images/OB-TF476_Treasu_K_20120604124920.jpg I ag…"
  • Merlin
    MerlinJuly 23, 2015"As indicated, no retail investor has lost any money on any of the bonds Apple has issued unless they have sold them and even in that case it may be that they lost less than they would have buying bonds of similar duration of other issuers depending on relative spread performance. My guess is most buy and hold because they are comfortable with the credit and the yield for the maturity of the bond. As already pointed out, Bond Funds are a different story. I own no bond…"
  • CharlieJuly 23, 2015"What about a thought for investors that bought the 3.45% 30 year issue in February of this year? It is now trading around 85 according to TRACE. That’s even more watches! Bondholders have not actually ‘lost’ any money though, it’s all mark to market and the article omits to mention that angle. Unless Apple defaults investors will be correct in buying a bond because ‘it’s Apple’. Hollywood makes a good point re people buying bond funds not bonds. I think this is very t…"

Addressing Market Liquidity – Blackrock White Paper

FILE - In this Thursday, Oct. 30, 2014 file photo, houseboats sit in the drought lowered waters of Oroville Lake, near Oroville, Calif. California voters overwhelmingly see the state's ongoing water shortage as a serious problem. A Field Poll released Thursday, Feb. 26, 2015 says 94 percent consider the shortage serious, and of those 68 percent find it extremely serious. California is entering its fourth year of drought with lower than normal rain and snow falling on the state that leads the nation in agriculture production. (AP Photo/Rich Pedroncelli, File)

Our recommendations take a three-pronged approach: (i) market structure modernization, (ii) enhance fund “toolkit” and regulation, and (iii) evolution of new and existing products

Download PDF

Comments
  • Iceman
    IcemanJuly 18, 2015"In the first paragraph they highlight the high levels of new issuance due to low rates. What they don’t highlight is the free alpha which has been too hard to pass up and has contributed to the continued new issuance. Would there be as much new issuance in the street if Buy Side firms were not trying to snap it up as an easy way to meet fund targets? In the second paragraph they highlight they are looking for a way forward but what they seem to ignore is what they hav…"
  • Merlin
    MerlinJuly 17, 2015"This is a much better attempt at trying to move things forward than the last Blackrock paper. Much broader and includes things the buy side should be doing. However, think they have simplified the activity of principal markets where on page 2 they state, 'In principal markets, the broker-dealer bears the execution risk of the transaction.' I would argue that in many cases they are bearing no risk as the execution of the trade is either closing out a position or hedgin…"
  • Goose
    GooseJuly 17, 2015"Charlie, thank you for so eloquently stating my position on the benchmark issue concept. Wolfman, I am in complete agreement on the IDB move. “I want to dis-intermediate and anger you….to trade with you!” That was some broadside. Will the street react as they have in the past? Are they still able to?. Interesting that BR says a key move forward is aggregation of market liquidity from different venues. I completely agree…but much easier said than done if you aren’t Bla…"
  • Wolfman
    WolfmanJuly 17, 2015"Remember, the reporter does all the work on a story and the Editor creates the headline. In this case, the editor boils this down perfectly as "BlackRock’s Latest Fix for Bond Trading Is Circumventing Banks". What I find remarkable is the fact that BlackRock has made it a point to throw down the gauntlet and poke the tiger. I agree with Hollywood that BlackRock won't get better pricing in the IDB market than they can when they disclose themselves to a dealer, but the…"

Corporate Bond Market Liquidity, A Way Ahead – Hedges Associates

crossroads

A $7.9tn corporate bond market would benefit from a futures contract and put it on par with every other major asset class in the world. Are you with me? Full Article

Comments
  • Merlin
    MerlinJuly 10, 2015"Stinger, of course your propensity to take on more risk was directly proportional to your comfort to move it. I myself never wanted to take on a long or short position without having at least three ideas IN ADVANCE of how I was going to move or cover it (which could involve setting up interesting swap opportunities). The game was, maybe still is, to take 70-30 bets instead of 50-50. Also Stinger (aka Ice Man, or do we already have a non-participating Ice Man?), I am g…"
  • StingerJuly 10, 2015"I wouldn't mind being associated with the 10,000 steps team, but I would draw the line at 10,000 maniacs... Assuming all the necessary pricing formulations are in tact, I quite like this proposal. In my opinion, corporate bonds have always been and will continue to be a relationship driven business (or at least in the foreseeable future), and hence the solution still lies in the ability of traditional trading and sales desks to build and maintain relationships in orde…"
  • Hollywood
    HollywoodJuly 10, 2015"I suggest the 10,000 Hour Team be 10,000-Steps-a-Day members as well. Ensuring sound mind and body. FitBits anyone?! Wolfman - Amen, my brother! The author proposes 2 solutions: Search Technologies and Hedging Instruments. In terms of Search Technologies, all of the solutions suggested are in the market and have existed for quite some time. Most top tier dealers are engaged with CodeStreet, Algomi, or have built proprietary memory capture and bond matching utilities.…"
  • Wolfman
    WolfmanJuly 10, 2015"Goose - thanks for the clip from the flash crash. It was great to hear a human reacting to the impact of a crashing market. We won't hear that anymore as computers are without emotion! As far as Mr. Hedges' proposal (how appropriately named, sir!) I think we need to better understand the entire workflow of corporate capital markets and who they are serving. Is it a valid proposal? Yes indeed. Will a non-fungible contract forcing everyone to trade on a single, for-prof…"

S&P: All That Bond Market Illiquidity is Bad for Bond Funds, But Not Banks – Bloomberg

bullfighting

The benefit of banks no longer warehousing as much bond risk, is that S&P doesn’t think they’ll be particularly vulnerable in the event of a big bond sell-off. The downside is that all those funds and vehicles that large and small investors have been using to snap up debt — such as exchange trade funds or mutual funds  are more susceptible to such an event since they promise ‘instant’ liquidity on what may prove to be illiquid underlying assets.

Comments
  • Goose
    GooseJuly 5, 2015"David Light’s excellent blog post (link found in this week’s newsletter) does an excellent job outlining how the Fed has similar thoughts to S&P’s statement “..Nevertheless, it is far from clear that market illiquidity will necessarily create systemic risk.” Mr. Light concludes the Fed is more than willing to accept less bond market liquidity to safeguard the overall financial system. Of course, that leaves John Q. Public investor, as the one holding the bag when…"
  • Merlin
    MerlinJuly 2, 2015"Zzzzzzzz....oh, hi there. I hope they aren't paying these authors at Bloomberg very much. A lot of regurgitation (do you recall asking "How did we get here?") where they show us some figures from the S & P report and then a concluding paragraph from S & P. Guess we should read the report to see if they provide substantiation for their conclusions because via the article it just seems like some people pontificating and there are enough of us that take that shor…"
  • Wolfman
    WolfmanJuly 2, 2015"It seems to me that the reduction in inventory by the banks is first and foremost a reflection of the end of a 30 year bull market in rates. In this game of musical chairs, they don't want to be the last person standing when the music stops. This isn't by accident, but by prudent planning by the banks. I would agree with the conclusion that the banks will be impacted to a lesser extent that others, but to what degree the others will be impacted is the real question. G…"