FCA Urged to Review Bloomberg Bond (Trading) Rejections – The Trade
May 12, 2016 \ 18 Comments
Full Article: The Trade
“There was a look of horror on the regulators’ face. In their view, the screen price is a real price so there must be liquidity, but that simply isn’t the case.”
This article should serve as a siren call to regulators who believe that all markets can behave in a similar matter. More importantly, it makes reading the Friday Newsletter mandatory for anyone in the fixed income markets. The curator of this site has captured the core of the message: ““There was a look of horror on the regulators’ face. In their view, the screen price is a real price so there must be liquidity, but that simply isn’t the case.”. Market structure isn’t about trading rules alone; it must take into account the market participants and what role they play… Read more »
I am shocked that they are shocked. This behavior is as old as electronic trading platforms in FI. This really comes down to an information problem related to both technology & information disadvantage: Technology. Participants don’t have all the supporting information immediately at their fingertips to make decisions. Therefore, FI has this inane concept of “last look” when displaying a level. When a bid is shown and all of a sudden someone wants to hit it, the first thing a trader thinks is “What information am I missing?”. Traders need to search the multitude of trading platforms to ensure their… Read more »
The corporate bond market is too fractured (36,000 CUSIPs in the US) and also lacks the liquidity to trade on continuous live prices. Half of the European corporate bond trades are done electronically. 80% of the electronic trading is done on Bloomberg. Dealers stream indicative levels on Bloomberg. Clients may then RFQ dealers. The indicative levels are advertisements. There was a debate about ranking / grading dealers based upon their hit rates. Dealers who quote many CUSIPs (say over 3,000) are not supportive of this model because they would then have to cast a smaller net (quote less CUSIPs) in… Read more »
Europe’s biggest issue is the belief that screens work and that the tight prices that get dealers on an RFQ to see the flow are firm. Screens don’t work and have not for many years, prices are tight to get the look but it does not mean you want to trade and anyone who believes dealers are 1×1 across TradeWeb, MAX, BBG and TRFI, MTS and whatever other platforms are out there are very much mistaken. The fundamental issue is the Buy-Side, in EMEA particularly, are hooked on using ALLQ as price discovery for block when it barely works for… Read more »
All empirical evidence suggests the credit markets are functioning well and regulators across the globe report no major issues with liquidity: – new issues continue print record numbers yoy – spreads continue to grind tighter http://libertystreeteconomics.newyorkfed.org/2016/02/corporate-bond-market-liquidity-redux-more-price-based-evidence.html#.VzRMyzjrvVS – plenty of indicative prices on screens – SIFMA TRACE reports show a 30% increase in volumes from 2010 to 2015. Jan 2016 ADV is 30.8bn which is an increase of 50% versus full 2010 ADV Finally one fund has a great idea and invites the FCA to show how hard it is to trade a bond and how anecdotal evidence is the norm… Read more »
Screen prices are not valid. The publication of invalid prices directly harms the functioning of the market because positions are marked too high and so NAVs also wrong. Having to trade a block of bonds 5-20bps back from where you are marked is a disincentive. We can take this further to say the buyside on seasonal redemptions won’t exit the risk it really wants to if the hit is 20bps over 5bps for a more desirable position. This situation of invalid prices has always been around but has gotten much worse in the last 3-4 years as dealers attempt to… Read more »
What the pages of the platforms covering Credit, emerging & other illiquid debt do not state which would be helpful is that ‘The prices represented on this page / platform are purely indicative of where the (said) dealer / s believe to be the value of the security. It is not representative of where execution will take place’ or some such words. Whereas the platforms on behalf of their dealer members have never nor would state this for a lot of reasons. Interesting the eCommerce at banks also play this game with their clients. So is this issue just related… Read more »
I can’t believe the regulators were truly surprised. As rightly pointed out Bloomberg gets away with not being regulated but indicative prices are also the norm on other B2C platforms… By the way the image of the empty pool is cute except that actually the pool appears full until you (need/want to) dive in!!!!
No surprise that the FCA is unaware of this practice of indicative price posting to obtain order flow information from the buy-side without committing any capital. Furthermore the Bank of England recently published a report claiming there was no liquidity problem in Fixed Income. Luckily no one really has to take any notice of what regulators think in this respect, until that is they start writing new regulations and MiFID II is a classic case. Delayed a year already, likely to be delayed further until regulators properly understand that screen liquidity is a game and the consequence of pre-trade transparency… Read more »
Hilarious that the BoE says there is no liquidity issue when with all these independent initiatives none need to seek BoE or FCA endorsement or explain what they are trying to do. Regulators spend such little time with market people, the technology & thus can’t understand what is going on. Well done Chris Bowie for his work to scare the FCA. Try the other platforms. When a bank in bond trading places a price is it executable, indicative, reference or purely an advertisement? Also the ownership of many of the main platforms being bank owned needs to be addressed
Sadly you quickly discover that large organisations like regulators and central banks do not share information internally. It explains a lot.
Part of the problem is Bloomberg’s regulatory arbitrage. It acts as a market, it is perceived as a market, but it is not regulated as a market – thus no accountability on firmness of prices and the corresponding phantom liquidity. As well, at least in the US, Bloomberg aggressively prohibits electronic access to its fixed-income systems to ATS as it views them as competitors, yet ALLQ itself is not an ATS. Similar competitive issues were raised in the FNL last week’s headline article, ETOMS, Bloomberg’s FI OMS, provides access to dealers and to ALLQ, but does not permit routing to… Read more »
This post hits it on the head. BBG is only the ultimate liquidity solution if you only look at them. They SHOULD be regulated.
They have a network. They should be leasing that network and clipping a fee. They are fighting a shrinking market, Eikon taking terminals, Symphony, etc. Why not lease your lines?
I am late to the party but as others have referred to, this has been an issue for years. I like to break things into ‘quoted price’, ‘live price’ and ‘quasi live price. Quote and live are obvious, quasi live is where the problem lies and unfortunately seems to have become the de facto in the markets. It is why live executable streaming is so difficult (talk to TradeWeb about their roundlot streaming idea!). You will either end up with a stream of a very small number of bonds with acceptable b/o spreads or a very large number of bonds… Read more »
I can only hope that the European regulators take the time to truly understand the dynamics of all OTC markets before making any rash judgments. In the US, we saw all too well how often the swap market was aligned to futures and the gross lack of understanding of the core principals of risk transfer and why a market maker extends credit to a client. This is at the core of the role banks play. As it relates to corporate bonds, with tens of thousands of issues, it should be no surprise that many if not most participants are not… Read more »
This will make you laugh. Six years ago I developed software that enabled buy-side clients to send my trading firm live, executable bids and offers that went onto ALLQ in the name of my trading firm, protecting their identity. This meant a buy-side could now be the bid and/or offer live and firm on ALLQ and get hit or lifted by other buy-sides, just like a market-maker.
It told me then that the buy-side have abundant liquidity that is better quality than the sell-side.
A lot of insightful commentary here already. My thinking pretty much follows the line of Mustang’s. Information fragmentation for market makers (you can’t even easily aggregate ATS’ markets, then throw in heterogeneous chat and message formats) leads to the need to manually check those multiple sources before committing to price. Plus, you are in competition trying to service your customer, who has grown to x times your size, and actually has a far superior view into the aggregated street view…yet wants to be done on the wire with your price. Today, the price for a dealer in being wrong is… Read more »
It is still a shock to me that after all the discussion surrounding this topic, including a plethora of news articles, numerous long conference panel discussion on Fixed Income market structure, and some rather deep analytical dives into fixed income market data from academia, that most equities centric regulators are still flabbergasted at the concept that fixed income electronic markets are indicative at best. With the operative words being “AT BEST”. Coming from an equity background I can understand initial confusion when first trying to get ones hands around the fixed income markets. But the focus of FI electrification has… 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