If A Tree Falls in the Forest: Illuminating the True Costs of Corporate Bond Electronic Trading – ViableMkts
January 26, 2017 \
7 Comments
Full Article: ViableMkts
It is very surprising that as buy-side institutions laud corporate bond electronic trading, very few fixed income asset managers know the true details of their transaction costs. In other modernized markets like equities, asset managers must be intimately aware of transaction cost details for electronic trading for two crucial reasons
Comments
This article mimics my experience when speaking with several buy side firms about FI e-trading costs. Some have no idea they are charged anything, some have a vague idea, most may know there is a charge but have made no effort to measure the cost vs execution. The other point fairly made here is that quick analysis of these particular firm’s counterparties usually shows they are doing approximately 85% of their volumes with their top 20 dealers. Given this fact, and given most of the high performing dealers are on every platform out there, it may be well worth the… Read more »
Very timely indeed. What do corporate bond investors pay for their electronic execution and are they properly measuring best execution? The author and Goose suggest the buy side does 80% of their electronic business with 20 or 25 dealers. My guess is they do 80 to 90% of it with just 10 dealers or less. So the analysis that has to be done is how much does one save on the 10-20% of the business they do with these other dealers vs. what they pay on the other 80-90%. If you can move 80-90% to a lower to no fee… Read more »
This is one of those “set it and forget it” kind of things. Definitely an important issue to bring to the forefront!
Let me give you readers the Fisher Price version of this article: There is no price competition for corporate bond electronic trading and this is costing the asset management community a TON in transaction fees. Why this is happening is a combination of laziness, arrogance, and more laziness. Just read this gem from Vanguard’s 2016 piece (Innovation and Evolution in Fixed Income Markets): “Focusing trading on a limited number of electronic venues, or aggregating trade information, will help ensure that the diverse universe of buyers and sellers will converge and liquidity will be concentrated. In addition, reduced fragmentation likely will… Read more »
I was at a recent conference where I heard a buy side firm say “they wanted the incumbents to develop the better protocols they are seeing from new entrants”. That gets a 100 on the laugh-o-meter. Yes, let me step right up and develop something that could erode my fat core business, acknowledge and compete in price and innovation with an upstart. As Jester noted, stop looking over your shoulder.. and look in the mirror.
I really like Jester and Goose’s comments (and I am sure I have taken shots at them before), they are spot on. I encourage the buy side to read their electronic trading vendor user agreements as my guess is 99% of those trading on them never have, and see what fees are disclosed. I think that you will be surprised to find out that with certain vendors there are no fees disclosed and no fee schedule provided. And also educate yourself as to what ‘open trading’ charges are. It is my understanding that in addition to the .1 to .5… Read more »
Great points, Merlin…really sobering.
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