Anthony Perrotta, TABB Group
"At TABB, we believe distribution of pricing information will encourage a microstructure change that will open up liquidity pools and encourage use of electronic platforms."
New York & London - Across a trading landscape for corporate bonds experiencing rapid change, leading to a reduction in immediacy and an erosion of quoted markets' value, third-party data providers are introducing intra-day and real-time, continuously evaluated pricing models to guide buy-side investors toward pre-trade transparency, with riskless principal replacing risk-based market making.
According to TABB Group in new research, "Corporate Bonds, The Price is Right," co-authored by Anthony Perrotta, principal, director of fixed income research in New York, and London-based research analyst Radi Khasawneh, the issue becomes, can the market integrate these new toolsets into current workflow requirements, adapting to the evolving needs of investors and liquidity providers?
"At TABB, we believe distribution of pricing information will encourage a microstructure change that will open up liquidity pools and encourage use of electronic platforms," says Perrotta.
The dealer model is changing. "The status quo of unreliable quotes combined with the backward-looking nature of FINRA's TRACE no longer will suffice if asset managers want to accurately assess transaction cost analysis and prove best execution," Khasawneh says.
"As a result," he continues, "data providers, including Interactive Data Corporation (IDC), Markit, Bloomberg and others are now providing more consolidated and continuously accessible pricing data in the relatively illiquid corporate bond markets, potentially guiding investors out of the darkness and toward the light of pre-trade transparency."
Today, approximately 80% of investment grade (IG) trades over $1 million modeled in real time by IDC reflected the end-of-day TRACE price. Additionally, 25% to 30% of the IG market, and 50% to 60% of high-yield bond transactions greater than $2 million in size are executed after a dealer has received an order, i.e., riskless principle, according to TABB estimates.
Geographically, the US is still the most liquid, covered market for third-party bond pricing, and modeled accuracy declines as examine trade size buckets, down to 62% for IDC in trade sizes less than $1 million. "This level of price certainty can ultimately advance the development of an order-driven model and multi-protocol electronic trading environment," explains Khasawneh.
In the decade since TRACE was established in the US, Markit iBoxx data shows that transparency has on the surface reduced bid/ask spreads and the explosion in volumes since 2008 backs this up. "This backward looking data has also been accompanied by a growth in electronic trading platforms," says Khasawneh.