US Corporate Bond Market: What Year Is It? – ViableMkts
July 7, 2016 \ 9 Comments
Full Article: ViableMkts
Practitioners from “modernized” financial markets who have no experience in corporate bonds find the US corporate bond market structure to be an enigma. This is because the technology, architecture and cultural practices in the corporate bond market are years behind other markets…..but just how many years?
(One of many) definition(s) of modernise: to adapt (something) to modern needs or habits, typically by installing modern equipment or adopting modern ideas or methods. There is always this pecking order of modern/cutting edge vs. old fashioned/backward thinking. Having moved from OTC markets to Exchange traded instruments, from Equities to Fixed Income, Rates to Credit etc… Have heard it all before. Certainly some of the ‘cultural practices’ have hindered change/progress (does this encompass the 3D 4k turbo-lucrative issuance process) but at the same time a lot of smart and adapted technology has made it’s way to this space. I believe… Read more »
So the bond market is 46 years behind the equity market structure. I agree. However every attempt at improving the structure has focused on the symptoms (technology, order books etc.) rather than the cause. Ten years ago the bond market worked much better but didn’t work well. Hardly anyone has looked at the underlying cause: problems with the product. Bonds are heterogeneous even within an issuer. Traders trade when they know risks inside out both in the product and market; the product precludes that. The Blackrock paper a couple of years ago seeking to create IMM like roll dates etc… Read more »
As the CS Global Trading Form this past winter, ex-SEC Commissioner Gallagher stated that the SEC had more than 200 people working on equity market structure, and 1/2 of one person’s time was spent on bond market structure. Measured on notional value traded, how can the bond market be allocated such paltry oversight? While I am not a fan of excessive regulation, sometimes a market needs an impetus to change, and regulation can act as the catalyst. Some type of Reg NMS for the bond market would be such a catalyst. As bond exchanges don’t exist, forcing ATSs to connect… Read more »
A brief, but thoughtful piece with a different angle. I agree with the answer. The key is around sequencing the development, with the foundation being quality pricing. The positive for the fixed income markets is that all the pieces needed to build (this is fixed income though; you won’t need them all) are laying on the floor. We can thank the equity market for that. It can be built much more quickly than the time it took equities to evolve. The negatives, the incumbent players have everything to lose with evolution to this type of structure. Jack reads the tea… Read more »
Curious what people think of the following developments that may catalyze further electronification: 1) At least three vendors are working on real-time pricing models for corporate bonds. More prices in electronic markets make such models better (more real-time inputs) while such models enable more participants to provide more prices in e-markets – a potential positive feedback loop. Some alternate trading protocols (session-based matching) are starting to use pricing form these real-time pricing engines and these session based venues often do large sized trades – their use of model-driven real-time pricing increases market confidence in such pricing. In lieu of a… Read more »
Since you asked for thoughts, I will oblige. Yes, there are several vendors working on real-time pricing for corporate bonds, but there is a large gap between their pitch and the performative reality of data in this market. For example, Markit just announced the launch of their real-time pricing product with the promise of providing on demand pricing information on 35,000 CUSIPs. What their offering may provide in breadth it will most definitely lack in accuracy. Bottom line, each of the new vendor models on real time pricing must be unpacked to understand the source of their inputs. If a… Read more »
Completely agree – it’s GIGO (garbage in garbage out) as far as these models go, right? The fundamental problem is lack of real-time reliable pricing inputs. And unlike, say, equities, the information to noise ratio of inputs from other markets (e.g. macro S&P 500, VIX, CDX.IG, …) is very low. Having made that general comment, I would say though that if one were to focus on the most liquid bonds, I don’t see why it is that difficult to have tradable real-time pricing – at least for odd-lot sizes. It’s a solvable problem, and has been solved or soon will… Read more »
There are no inputs. These “real time” pricing feeds are a sham. You will never create an oddlot market where you can hedge roundlot trades. You cannot auto trade a roundlot market. I am not convinced you can auto trade an oddlot market successfully unless all you are doing is trading off of others prices. We have been trying to put a square peg in a round hole long enough. Can’t everyone just go do their jobs? The market has and will continue to adjust to the current market conditions. Some people have ideas they think will improve conditions; we’ll… Read more »
“You cannot create liquidity, but only try to ensure that all liquidity opportunities are actioned.”
In the current market, I wholeheartedly agree. I think too many are focused on creating new liquidity, when that seems like too huge of a lift. Instead, if we additionally focused on maximizing every possible liquidity point, we’d be in a better position.
What good is a bid or an offer on some electronic platform if it’s nearly impossible to find?
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