BondCliQ 9 Dealers Away From Operating Full-Scale SIP for Bonds – by Rebecca Natale (twitter: @rebnatale)
Tier-1 corporate bond dealers are still holding out from contributing their quote and pricing data to the two-year-old platform.
BondCliQ has secured 36 out of roughly 45 capital-committing dealers needed to run a full-scale Securities and Information Processor (SIP) for the corporate bond market. Similar to how other SIPs work for cash equities—the Consolidated Tape Association operates the SIP for NYSE-listed equities while the UTP Plan governs a similar system for Nasdaq-listed securities—BondCliQ is working to create an industry utility that will give investors equal access to bid, ask, and size data in the corporate bond market, and dealers a clearer view of the market. The remaining hold-outs are among tier-1 investment banks.
Because bonds trade infrequently compared to stocks, and because the organization of pricing data is lackluster at best, the valuations used on a daily basis are only as good as best guesses, says Chris White, BondCliQ CEO. For example, on February 3, the most actively-traded bond belonging to the most actively-traded issuer in the most actively-traded sector—JP Morgan, which is not quoting on the system—traded 113 times that day. After isolating the institutional trades—trades equal to and more than $1 million—113 dropped to just 17, according to the BondCliQ platform.
White says that some traders have built their own systems similar to what BondCliQ offers by having direct communication with all of the dealers, but the more pervasive problem affects the dealers—they have no idea what other dealers are pricing their bonds at.
“The question that you have to ask yourself as a dealer today is: Is my business better off with my sharing data with other dealers, and being able to accurately calculate where I should be putting my prices?” White asks. “Or, is my business better off with me trying to hoard pricing information and not being able to see what everybody else is doing?”
White draws a parallel between the dealer dilemma and the US domestic airline business of the 90s and early 2000s, when major airlines like TWA, Pan Am, and Eastern went bankrupt. Today, the masses can book any flight online. But 30 years ago, a simple flight from New York to Boston required using a travel agent, who would compare different flights because the information wasn’t yet public. The thought was, White says, if Delta knew what American Airlines’ fare was, or vice versa, it would result in a price war. But with the advent of aggregator sites like Expedia, sharing of data allowed airlines to know how best to price seats so they could sell out a flight, know when to cut ticket deals, and better understand how to optimize returns on planes and fuel.
William O’Brien, an investor in BondCliQ and former CEO of Direct Edge, which merged with BATS Global Markets in 2014, thinks 2020 will be a critical year for growth of the start-up, which went live with the first version of its system in December 2018. He anticipates the company will start to land some of those tier-1s, but right now, he says they’re playing poker.
“Yes, of course I want to know what’s in everyone else’s hands; I just don’t want to have to tell you what’s in my hand,” O’Brien says. “For the overall dealer community, the sell side is very poorly served by not knowing the quotes of its competitors because they’re costing themselves money every day.”