Pricing (Corporate Bonds) in the Dark – Risk Magazine (free download)
January 20, 2017 \ 5 Comments
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Asset managers claim they have an information edge over dealers when it comes to (corporate) bond pricing. How are sell-side players countering the threat?
Buy side does have an edge at the moment. Sell side has lost control of the information flow. The quicker it can consolidate the stream of pricing information, the more quicker the imbalance of the information advantage can be corrected. Neither electronic trading nor all to all trading will be the tools to solve this imbalance.
I agree with Viper’s points. We know the sellside is starving secondary trading of balance sheet for years because the business was not economically viable from capital costs, and more recently increased information asymmetry biased to the buyside etc. Banks now recognize this and better need to control their information. The buyside needs the sellside as its insurance policy not for the 95% of time but the 5% when the buyside price makers and sellside market makers are shown for what those terms mean. Stretching the 95% of happy times to a 100% is a mirage and so the asymmetry… Read more »
Information was not at the core of the dealer-as-market-maker model – capital was. In the vacuum left by persistently low rates and regulatory restrictions on capital at risk, the buy-side is engaging as price makers. Rates aren’t skyrocketing and risk tolerance may increase somewhat, but the reality is that if dealers can’t make money making markets, they have no incentive to do so. I think the most interesting part of the report was that the buy-side starts with a price and then dealers respond with their actionable quotes. Seems like bass-ackwards to me and less efficient, but it’s a model… Read more »
Risk takes up the mantle on a critical liquidity topic that hasn’t gotten much coverage. Dealer price discovery continues to diminish to the detriment of the dealers, and just as importantly, to the buy side. While the buy side can opportunistically provide liquidity, I believe it is a pipe dream to think they will become truly significant players in immediate risk transfer. The more markets evolve electronically, the more important the market makers become. Ask the exchanges who is the first group they talk to when considering protocol and price changes, why did dark pools allow allow market maker participation,… Read more »
I think the buy-side is also scarred by what happened in 2008. They understand now that given the evolving regulatory environment, they don’t ever want to be beholden to dealers for liquidity. And why should they be at this point given they hold more of the bonds and have better price discovery? Dealers were always banking on the opaqueness of the OTC market to make money and that model is no longer viable given the push to transparency. Depending on the nature of the buy-side firm (remember, not all buy-side firms are able to become price makers because of their… Read more »
Blackrock’s Richard Prager: The Liquidity Is Out There – Institutional InvestorMarch 18, 2016
Everyone is Worried About the Thing Markets Need Most, But They’re Not Asking the Right Questions – Business InsiderMarch 25, 2016
US Companies Overpaying for Bonds; Banks May Be to Blame – ReutersMarch 31, 2016