MerlinOctober 23, 2015"Now you know what happened to liquidity. People tried and continue to try to turn the art into a science. I am not suggesting the markets need to revert to policies and protocols from the 80's. The 90's and early 2000's are goo enough where there was much better balance between buy and sell side accounts. What I find fascinating about today is the reluctance of people to share information feeling that this information will be used against them. Without information, ma…"
WolfmanOctober 16, 2015"Walmart's focus on innovation in retail helped it to create the world's largest retailer. That said, the stock tanked this week because it is taking some very big steps in increasing the minimum wage they pay their employees and making significant investments in ecommerce. Even when an organization is able to remove the single-silos that may inhibit innovation, there are still numerous challenges for any organization to innovate. I think we are going to see a transfor…"
Paul ReynoldsOctober 16, 2015"It's not just a problem in capital markets. Look at any innovation in the last ten years in finance and you will find it came from a non-bank initiative. Paypal, Transferwise, Apple Pay, Bitcoin, crowfunding etc... Every part of banking is now challenged by innovative, smart start-ups that take one activity and turn it on its head. Banking will be unrecognisable in the next five years.…"
GooseOctober 15, 2015"Innovating across business silos generally presents the unstated question, “Who’s ox is going to get gored?” The innovation benefits the overall firm, but key personnel in the silos needed to cooperate may suffer gains or losses from the outcome. Business managers get yearly compensation by generating profits and serving the needs of their customers TODAY. As a friend said to me, “I don’t get paid for long term visions”. Anything that disrupts the ability to generate…"
CharlieOctober 15, 2015"After years of cutting IT budgets to the bone, directing all expenditure to meeting new regulatory hurdles and shutting out requests from business lines to fund new products and change requests for competitive developments, an Innovation Team is created that ‘will help move the bank forward’. Does anyone else see anything wrong here? Is it surprising that the whizz kids are met with resistance? How is the Innovation Team partnering with the businesses to address the r…"
StingerOctober 8, 2015"And to think, these past several years all we needed was a few arbitrary references to a handful of loosely defined charts to prove there are no liquidity issues and to support theories of a major positive shift in market structure. All FI investors out there who have been cautious, this is your sign to get back in there and BUY!! BUY!! BUY!! Ok, apologies for my tongue in cheek response intro but after reading this article I couldn't help it. I really cannot follow t…"
WolfmanOctober 8, 2015"Not only is this "illogical", it doesn't take into account that RATES ARE PERSITENTLY LOW and these low rates must be taken into account when making a judgment that bid ask spreads are low by historical standards. I can see Captain Kirk hearing Spock say that this is illogical and then he calls down to the engine room, where, by the way the rates are set, only to hear Mr. Scott say "I'm givin' here all I've got Captain!" Do we think the execution of Monetary Policy ca…"
MerlinOctober 8, 2015"These guys work for the Fed? Does that mean they are govt employees and we pay their salaries? Ugh. I don't pretend to know the answers to the questions posed, although i have my opinions, but this study seems extremely flawed. Lets only just look at their conclusion of the average bid offer spread over time. if i am interpreting properly the researchers are using the 5 day moving average of each bonds bid offer spread using the daily average price of purchses from cl…"
GooseOctober 7, 2015"Whoa, I have several thoughts/questions about this article before I also leap onto the “all is well” square on my “Jump to Conclusions Mat”.* - 400 Billion in corporate bond US dealer inventory? I have seen different numbers, but never one like that. I think GS estimated the high at 40 billion, with mortgage and credit at a high of 240b. - How do you make market conclusions looking only at HG bonds, and then in the follow up article only 60-100 of HG bonds in the most…"
The pension fund estimated it was owed $500 million and Mr. Weinstein had less than two months to refund the money. Mr Weinstein pleaded with the fund to allow him to pay it back in installments over several quarters, arguing that it would be difficult to get top dollar for some of the most illiquid assets – like corporate bonds. FULL ARTICLE
MerlinOctober 2, 2015"The shady business of Hedge Funds. Who really knows what goes on behind those walls...... The Pension Investment Board of Canada, whomever that is (dopey me) was the LARGEST investor in the Saba Fund. Why? Was there a personal relationship with Boaz or did he and his marketing team just talk themselves into the PIBC's (easier than writing out again) pants? What did PIBC not understand about the sophisticated strategies (I assume based on his background and his persona…"
GooseOctober 2, 2015"Agreed Wolfman. When you want to/HAVE to move something it’s worth what someone will pay for it at that instant, period. I am sure there could be a lot more to the story, but if I have this right, Saba has this distressed position marked where he thought he could sell it tomorrow. Given the nature of the asset and market structure, the ability to determine that can only be described as difficult at best. As Charlie said, time to get a new PM if they thought the outcom…"
CharlieOctober 2, 2015"If my math is correct they are suing over 2.4% of the portfolio value. I don't see an egregious miss marking of assets here, it could easily be within the bid / offer for the size of the position. The client knew the fund strategy and holdings, the client had investment professionals (or at least I suspect that is what they held themselves out to be when negotiating their renumeration) and they clearly failed to appreciate the risks of their investment. They should al…"
WolfmanOctober 2, 2015"THE ONLY BUYER! Oh boy. Bottom line, there is a price of immediacy and yes, that price will vary. What thinks you?…"
I was an Illiquid Credit trader at Barclays. A pre-crisis label for the desk that priced any of the 325,000 bonds outside of the 5,000 market-made by the bank’s flow desks. It could have been an off-the run $250MM US issuer, a €10MM private placement, a structured note, a CLN etc.
When asked for a bid we needed the underlying prospectus – we couldn’t blindly trust the Bloomberg DES page. I’d read the prospectus and structure the data in my head to form an opinion of the contractual terms: covenant strength, calls, puts, makewhole, change of control strike, fallaway covenants, coupon step-ups on rating changes, seniority, form of guarantees etc.
Investment grade paper, let alone high yield or bank capital, see prices materially differentiated after an event by previously overlooked language: Lehman Brothers, Sino-Forest, VW, Co-operative Bank, Puerto Rico, Detroit, BP, Tokyo Electric, AIG. Cue the shout “WHAT’S IN THE DOCS?”.
Trading desk analysts appeared 10-15 years ago to specialise in finding hidden gems or dangers in documentation – now it’s a risk function. Each bank, asset manager and hedge fund reads the same docs to eke out extra information because there’s no central source they wholly trust resulting in non-standardized, duplicated work.
The interesting, important language, at best, often ends up as notes in Excel spreadsheets listed by ISIN rather than in risk systems for the whole firm’s benefit.
Three years ago SGDA was formed to materially improve the accuracy and speed of risk understanding. Our team includes former board members from Markit, Bloomberg, Allen & Overy, LCH.Clearnet, Boston Consulting and credit traders.
It took us three years to ‘structure’ the data of any bond to a greater level of detail than has previously been achieved – identifying all possible terms and storing the information in a standardized method. The variables were diverse: thousands of issuers, 20 major law firms, 50 global banks, various languages, issuing debt at different times in the economic cycle. Each of these variations causes differences in the legal wording – but is stored in a consistent manner in our database. We paid particular attention to high yield covenants.
Any term currently manually searched for in a pile of prospectuses can now be instantly searched and verified. A full understanding of even high yield documentation used to take 1 hour, now it can be done in 4-5 minutes and then instantly compared in a standard way to other bonds. Our quantitative comparison tool shows why there’s a 15bp pickup switching from a GE ’28 to GE’29 when the curve should be 3bps.
There’s about a 130 individual terms in a simple document, and about 750 in more complex ones. Each of those in turn has additional permutations and each having different impacts during events.
Over those three years we read everything (in various languages) from Canadian provinces to Australian High Yield to US municipal issuers to Swiss CoCos.
Our data accrual processes and the Oracle system was what we needed as traders and risk appraisers. From the outset the we sought to solve:
No opinions or qualitative views – just quantitative facts.
Your job is to decide what to invest in, based on all the facts. That’s not the role of a third party.
No desire to blindly trust a data provider – instant self-checking to the underlying sentence.
All data fields’ cited sentences can be instantly viewed as highlighted sentences that our London-based analysts read during processing. Darting from the relevant highlighted line on page 34 to another on page 311 is a huge time save.
Our vision is simple: on entering a trade, you should know every possible outcome for a given event.
This detail and understanding has never previously been available. From cleansing your portfolio of any southern European risk (paying agents, all governing laws etc.), creating strong and weak covenant high yield indices, 11 different negative pledge attributes, covered bond LTVs, laxity of cross-acceleration quantum, various Event of Default grace periods, Reg S Category 1 or 2, or preventative corporate actions (knowing the last notification day and methodology for events, such as options).
We have the capability and the data to change the way credit is traded, and reduce market and operational risk.
WolfmanSeptember 25, 2015"I hope whoever is subscribing to the Friday newsletter appreciates the value that it brings. Over the last few months, the focus articles have steadily built upon a theme. That theme is the overall transparency and liquidity of the bond market. We have seen articles related to the "electronification" of the bond market, seen startups once praised for their forward-thinking and enlightened solutions to corporate bond liquidity unceremonially close shop. We have heard f…"
CharlieSeptember 25, 2015"Good to see the SEC reacting to the noise about broken bond markets and illiquidity. It is not necessarily bad news for investors or mutual funds. One benefit would be investors remaining in the fund are no longer penalized by having to pick up any losses caused by leaving investors being paid the NAV. Another benefit could be managers can reduce the liquidity buffer and so track their target index more closely meaning larger returns for investors (hopefully positive)…"
MerlinSeptember 24, 2015"It seems to me that it would be a good thing for more disclosure around a particular funds liquidity and would be considered an improvement over today's requirements. Investors could then take this expected/hoped for improved disclosure and incorporate it as another input into their investment decisions. Unclear whether this disclosure could somehow include a numerical measure of the funds liquidity but think that would be nice for retail investors if possible. My gue…"
StingerSeptember 20, 2015"The amount of research and analysis done to support this paper is impressive. Having done some analysis of trace and quoting data (albeit not to this extent), I do share some of the views (as well as some of the frustrations) around how to assemble what seems like a good indication of how trades have been executed and at what price. However I do not share the author conclusions, as I feel most of his points seem to be broad strokes based on non conclusive data sources…"
MerlinSeptember 19, 2015"I was going to take a pass on this one because the paper deserves a lot more attention than I am able to give it right now but Wolfman hit a chord with me. What good is having a 'fairer' price dissemination method if there are no prices to disseminate? In other words, take all of the profit out of it and the price makers go away and you are left with an even more illiquid market. Sure, you can argue that the largest most liquid issues could still transact this way and…"
WolfmanSeptember 18, 2015"I will openly admit that I have not analyzed this paper as closely as the effort put into preparing demands. That said, it leaves me with this nagging question. Why is it that the credit market is continually compared to the equities markets? Is a consolidated quote mechanism the only real difference that has stymied the advancement of the electronic trading in credit? Information asymmetry is the mechanism by which most service companies generate revenue. Technology…"
CharlieSeptember 17, 2015"The authors have clearly done a lot of analysis as I have only skimmed the article and my experience is in the institutional market I found myself disagreeing from page 1! Perhaps the authors points are actually more related to practices in retail / mid market? Irrespective of institutional or retail I found myself thoughout this thought provoking paper asking ‘what does the FINRA rule book say?’ It would be fascinating to put all the practices discussed in the contex…"
MerlinSeptember 11, 2015"Thought provoking and some excellent comments by Charlie and Hollywood (you guys/gals been practicing?! :) ) Would be interesting to see this as a time line as implied by Hollywood and notional as suggested by Charlie. Think would tell an interesting story. One thing is for sure, it took a LONG time for the two to the right to get to where they are after over 15 years of e-platorms going back to 1999 and Trading Edge, Limit Trader and others. Surprised UST is as low a…"
HollywoodSeptember 11, 2015"McPartland states: “Driven primarily by new rules requiring index CDS trades to be executed on a swap execution facility, the dealer-to-client market for CDX.IG trades is now the most electronically traded in the US” – The implication is that regulation created the growth of a move towards electronic trading. However, prior to SEFs going live CDS Index was already trading 75% electronic (without regulatory mandates). This was an organic evolutionary process for a stan…"
CharlieSeptember 11, 2015"Fascinating chart from Kevin McPartland, as always! I can't help wondering what the chart would look like if Equities were displayed on a notional basis instead of commission dollars. If we were to take out the 'regulatory effect' i.e. the mandating of SEFs it would seem that little has changed over 10+ years, no ground swell adoption, no catchy innovation. Outside FX and to a great extent equities / US treasuries electronic trading is struggling to make an impact. If…"
GooseSeptember 4, 2015"The 3 main pillars are the top 5 underwriters, large investors, and issuers. As commentary has stated, there is zero incentive and interest for two of them to change the structure. The US Treasury auction/primary dealer model shows that variations of the concept can work, depending on nuances of the market. Google ran an auction for their IPO, and there was plenty of hoopla around it. Here is a link to an interesting 10 year look back article from Forbes, http://www.f…"
CharlieSeptember 4, 2015"The premise of looking at primary allocation and ensuring fair and equitable distribution not to mention best execution for the borrower is an honorable objective. ESMA’s implementation timeline of December is worrying. Will we get a well thought through piece of legislation that is easy to implement and enforce? I have to agree with Mr Ewing of ICMA the present proposal is unworkable in a cost efficient manner and more to the point it compliance cannot be monitored i…"
JSeptember 4, 2015"Neither the banks nor the largest participants in the new issue business are incentivized to change it given the benefit both derive (large allocations with essentially guaranteed p&l along with higher fees than are likely to prevail in something more open and competitive). How would anything entrepreneurial really find enough support outside of external pressure?…"
MerlinSeptember 4, 2015"I like the idea of somehow changing the way that bonds get issued (assume equities has the same problem) but I don't like the regulators being involved. There have been a number of efforts over the years, I believe with the H & Q model having the most success in the prior decade (not sure if this system is still in operation, sorry to those running it if it still is!). Motivated issuers, dealers and buy side participants wishing to see a change can easily find qua…"
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.
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…"
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…"
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…"
Comments
What’s the Biggest Challenge to Innovation in Capital Markets? – Financial News
Comments
Has US Corporate Bond Market Liquidity Deteriorated?- Liberty Street Economics
Comments
The Perils of Forcing a Sale of Illiquid Assets – DealB%k
Comments
Ever heard the shout: “WHAT’S IN THE DOCS!” – Jon Shaw SGDA
When asked for a bid we needed the underlying prospectus – we couldn’t blindly trust the Bloomberg DES page. I’d read the prospectus and structure the data in my head to form an opinion of the contractual terms: covenant strength, calls, puts, makewhole, change of control strike, fallaway covenants, coupon step-ups on rating changes, seniority, form of guarantees etc.
Investment grade paper, let alone high yield or bank capital, see prices materially differentiated after an event by previously overlooked language: Lehman Brothers, Sino-Forest, VW, Co-operative Bank, Puerto Rico, Detroit, BP, Tokyo Electric, AIG. Cue the shout “WHAT’S IN THE DOCS?”.
Trading desk analysts appeared 10-15 years ago to specialise in finding hidden gems or dangers in documentation – now it’s a risk function. Each bank, asset manager and hedge fund reads the same docs to eke out extra information because there’s no central source they wholly trust resulting in non-standardized, duplicated work.
The interesting, important language, at best, often ends up as notes in Excel spreadsheets listed by ISIN rather than in risk systems for the whole firm’s benefit.
Three years ago SGDA was formed to materially improve the accuracy and speed of risk understanding. Our team includes former board members from Markit, Bloomberg, Allen & Overy, LCH.Clearnet, Boston Consulting and credit traders.
It took us three years to ‘structure’ the data of any bond to a greater level of detail than has previously been achieved – identifying all possible terms and storing the information in a standardized method. The variables were diverse: thousands of issuers, 20 major law firms, 50 global banks, various languages, issuing debt at different times in the economic cycle. Each of these variations causes differences in the legal wording – but is stored in a consistent manner in our database. We paid particular attention to high yield covenants.
Any term currently manually searched for in a pile of prospectuses can now be instantly searched and verified. A full understanding of even high yield documentation used to take 1 hour, now it can be done in 4-5 minutes and then instantly compared in a standard way to other bonds. Our quantitative comparison tool shows why there’s a 15bp pickup switching from a GE ’28 to GE’29 when the curve should be 3bps.
There’s about a 130 individual terms in a simple document, and about 750 in more complex ones. Each of those in turn has additional permutations and each having different impacts during events.
Over those three years we read everything (in various languages) from Canadian provinces to Australian High Yield to US municipal issuers to Swiss CoCos.
Our data accrual processes and the Oracle system was what we needed as traders and risk appraisers. From the outset the we sought to solve:
Your job is to decide what to invest in, based on all the facts. That’s not the role of a third party.
All data fields’ cited sentences can be instantly viewed as highlighted sentences that our London-based analysts read during processing. Darting from the relevant highlighted line on page 34 to another on page 311 is a huge time save.
Our vision is simple: on entering a trade, you should know every possible outcome for a given event.
This detail and understanding has never previously been available. From cleansing your portfolio of any southern European risk (paying agents, all governing laws etc.), creating strong and weak covenant high yield indices, 11 different negative pledge attributes, covered bond LTVs, laxity of cross-acceleration quantum, various Event of Default grace periods, Reg S Category 1 or 2, or preventative corporate actions (knowing the last notification day and methodology for events, such as options).
We have the capability and the data to change the way credit is traded, and reduce market and operational risk.
Jonathan Shaw
Chief Executive
SGDA
jonathan.shaw@sgda.com
Please visit us at www.sgda.com or call us on +44 203 588 9900.
Comments
Liquidity Rules Proposed On Outflow Fears – FT
Comments
Transaction Costs, Trade Throughs, and Riskless Principal Trading in Corporate Bond Makets – USC Marshall School of Business (Larry Harris)
Comments
The New King of Electronic Trading is…-Greenwich Blog
Comments
Banks Brace for European Crackdown on Corporate-Bond Allocations – Bloomberg
Comments
Why FinTech is Hard: Lessons from the CEO of BondCube – Huy Nguyen Trieu
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
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