Data Required for Fixed Income Evolution
Corvil, which provides data analytics for electronic trading, is expanding into fixed income as regulators have highlighted the need for standardized data and cross-platform market pricing information in the bond market.
David Murray, chief business development officer at Corvil, told Markets Media: “The electrification of fixed income has accelerated and there will continue to be new venues and trading protocols.”
Corvil can provide real-time information for both price takers and price makers which Murray said was important as the role of the sellside and buyside continues to evolve. As banks have cut their balance sheets and reduced market making in bond markets , there has been an increase in all-to-all trading with some buyside firms supplying liquidity.
For example, Corvil provides investors with metrics to monitor execution success across their fixed income venues, order intent, and algo responsiveness. For the sellside, Corvil data can help identifiy and analyse missed prices and hung orders. Increased transparency can also help satisfy regulatory requirements for cyber security, precision time synchronized record keeping, and transaction reporting such as those in MiFID II, the new regulations in the European Union from 2018.
Anthony Perrotta, chief executive and head of fixed income research at consultancy Tabb Group, said in a statement: “With electronification and market-making renaissances underway across bond markets, firms that effectively leverage technology to gain insight from trade flows and optimize their system performance will gain better access to liquidity and be well-positioned to satisfy future regulatory transparency requirements. Our research indicates that over 60% of large banks and asset managers believe workflow optimization solutions will increase their competitive capabilities in 2017-18.”
Murray continued that Corvil’s data provides more benefit as markets become more electronic. Therefore liquid markets such as rates and US treasuries, which have a high share of electronic trading, will immediately benefit while less liquid segments such as corporate bonds will benefit as they become more electronic.
The International Organization of Securities Commissions said in a report last month that there are concerns that it will be difficult for technology to achieve rapid increases in efficiencies for locating and pricing securities because of small number of corporate bonds available to trade, the lack of a centralized liquidity pool and the many different execution preferences.
Iosco said: “To address this, there are a number of current industry initiatives, such as Project Neptune, now Neptune Networks, which initially began in Europe as a means to standardize data and offer cross-platform market pricing representation, and has since expanded to a number of global institutions.”
Last month Nomura and Jefferies joined Neptune which allows institutional investors to access real-time bond pricing from banks in a standard format. In 2014 a group of buy-side and sell-side institutions began discussing how best to distribute real-time axes in a standard open source format, which has since been approved by the FIX Trading Community’s fixed income sub-committee.
There are currently more than 19,500 real-time axe indications in the system, updating around seven million times per day. There has been a 15% growth in bond indications of interest since the end last year according to Neptune, which the firm said has been driven by dealers using the platform as their preferred channel to distribute this data to their clients.
The International Capital Market Association responded this week to the European Commission’s mid-term review of the proposed Capital Markets Union across the EU member states. ICMA said in its response: “It is clear that, despite market initiatives related to technology, data, and connectivity, including electronic trading and matching facilities that promote all-to-all trading, as well as buyside behavioural changes that enable their provision and sourcing of market liquidity, liquidity in the corporate bond secondary markets is still very much reliant on the market-making model.”
The response continued that the intrinsically disparate, heterogeneous, and long-term nature of corporate bond markets is not suited to the exchange-based models in equities or financial futures as the the immediacy that investors require can only be provided by broker-dealers willing to act as market-makers.
“ICMA believes that, while new initiatives and protocols that reduce dependency on the market-making model should be fully explored and encouraged, there is still an important need to support, and even revitalise, the market-making function of banks and broker-dealers,” said the response.
In a study last year on the European corporate bond secondary market ICMA made a number of recommendations on how market participants should respond to more challenged liquidity conditions. These recommendations include providing capital relief for market-making; revitalizing the single-name credit default swap market; reviewing and reassessing harmful regulation and bringing all stakeholders together to review the market structure in a formalized and structured forum.
Trading for liquid bonds could eventually move entirely to central limit order books.
An increase in public data would support price discovery.
Under MiFID II the buy side needs to know which firms are systematic internalisers for individual securities.
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