Risk: US Dealers Agree to Disclose Corporate Bond Quotes

Market to get pre-trade transparency but big dealers remain on the sidelines. By Kris Devasabai, edited by Olesya Dmitracova

A group of US corporate bond dealers will begin sharing pre-trade price information with each other for the first time this week in an effort to boost liquidity, although the five biggest market players will not take part.

The dealers will post their best bids and offers for a selection of widely traded investment-grade bonds on an electronic bulletin board hosted by BondCliQ, which is aiming to create a consolidated quote system for credit securities.

Chris White, chief executive of BondCliQ, says eight dealers have already signed contracts to provide quotes, and another 10 firms have made verbal commitments to participate. He declined to name the dealers, citing confidentiality issues.

Risk.net confirmed the details of the initiative with traders at three of the participating dealers – two large European banks and an Asian firm – who discussed the matter on condition of anonymity.

“At the moment, there are no reliable ways to price risk before you take it, because dealers don’t know what their peers are quoting,” says a credit trader at one of the dealers that has agreed to provide quotes to BondCliQ. “This is the first time we will have meaningful pre-trade transparency for corporate bonds.”

According to these sources, BondCliQ will display a scrolling montage of non-executable, pre-trade quotes for around 1,200 of the most liquid US investment-grade bonds. Dealers will see the best bids and offers for each bond quoted on the platform as long as they meet the minimum quoting standards in the relevant sector. The identities of the dealers will not be visible to other sell-side participants, but they will be to buy-side users once the service is available to them.

“We’re trying to empower dealers with transparency,” says White, who previously ran the GSessions electronic bond-trading platform at Goldman Sachs. “If you can see the quotes from other dealers, it allows you to accurately price market risk and liquidity. You don’t have to call your customers to ask them where the market is.”

Currently, dealers have access to the Financial Industry Regulatory Authority’s post-trade reporting service, Trace, and pre-trade information from Bloomberg’s ALLQ service – although the latter is considered a less-than- reliable gauge for pricing large trades.

The market is not trading because dealers need more information – they’re not trading because they don’t know where to trade
Chris White, BondCliQ

Dealers say this leaves them at a disadvantage to the buy side, which has access not only to ALLQ but also to Bloomberg’s dealer runs, which list the prices at which dealers are willing to buy or sell various bonds. Asset managers can also mine quote data from Bloomberg messages sent to them by different dealers – and some firms have built technology to automate this process – while dealers can see only the quotes they themselves send to clients.

“There is a built-in information asymmetry in the market,” says a corporate bond trader who has worked at several large banks. “The customers see all the dealers’ prices and how much liquidity they will provide at that price. The dealers themselves have no ability to see where their competitors are pricing similar risk.”

Asset managers have leveraged this information edge to opportunistically provide liquidity on new all-to-all trading venues, such as MarketAxess’s Open Trading, which allow the buy side to act as price makers or takers.

Some argue the lack of pre-trade transparency for the sell side has reduced liquidity in the US corporate bond market, already pummelled by tough capital rules on banks introduced after the financial crisis.

“In order for dealers to feel comfortable playing the role of liquidity providers, it requires a certain amount of information and visibility on pricing and where a bond is trading,” says a credit trader at a second dealer that will provide quotes to BondCliQ. “If we had better pre-trade information, there would be more dealers making firm bids and offers.”

BondCliQ is the latest in a series of industry initiatives designed to get liquidity flowing in corporate bonds. Others include Neptune, a messaging network for pre-trade communication in corporate bond markets, and Algomi, which has created a bond information network – to name two.

White says prior efforts to fix the market approached the problem backwards. “The philosophy of most platforms is that the reason the market doesn’t trade is because the buy side needs more information, and dealers don’t know how to provide that information,” he says. “Our philosophy is that the market is not trading because dealers need more information – they’re not trading because they don’t know where to trade.”

Dealers say pre-trade transparency will also help them refine their pricing models with new inputs, such as implied volatilities. “The risk implications of pre-trade data are huge,” says a buy-side credit trader, who previously worked on the sell side. “You can better calculate your risk with implied data – not just realised volatilities from the Trace tape [list of trades]. As market-makers get more algorithmic and employ artificial intelligence, this [implied volatilities] allows dealers to actually quantify how prices move around various events and how they should respond.”


Taking on the Goliaths

Pre-trade transparency could help smaller dealers compete with the five largest US investment banks – JP Morgan, Bank of America, Citi, Goldman Sachs and Morgan Stanley – which underwrite roughly 50% of primary issuance in investment-grade corporate bonds and have a similar share of secondary market volume.

“Part of the information advantage the big banks have is tied to the fact they do so many new issues. They have order books, and if they have interest in a bond, they know they sold it as a new issue to these 50 accounts and they can call them to see if they want to sell some,” says the credit trader at the second participating dealer. “This [BondCliQ] is a big help to the smaller dealers that don’t have a big sales force or access to new issue books and can’t collect as much information. It doesn’t make it perfectly even, but it allows everyone to play on a more equal footing with the bigger firms.”

The initial group of firms that have agreed to provide quotes to BondCliQ at launch consists of smaller US banks and broker-dealers and foreign banks. White says these firms have the most to gain from improved pre-trade transparency. “This service has been specifically designed to democratise institutional order flow,” he says, adding that BondCliQ is trying to create an environment where orders are channelled to dealers offering the best price, rather than to those that dominate issuance.

This could be part of the regulatory solution to pre-trade transparency in the US
Credit trader, participating dealer

BondCliQ has not engaged with the largest US dealers about providing pre-trade quotes for its platform. “It’s unlikely that they would be a first mover to improve the availability of institutional pricing information,” White says.

The company expects to soft-launch its consolidated quote service this week. The screens will be made available to participating dealers only and will cover investment-grade bonds in the banks and financial services sector.

White says the plan is to offer the service to the buy side in May. Asset managers will be able to see attributed quotes from dealers at different sizes. BondCliQ has also created a proprietary system to rank participating dealers based on price, order size, consistency of quoting and speed of repricing. “The buy side will see which dealer is quoting, how well they quote and how much size is available,” says White.

Every buy-side user will see the same prices from each dealer. “All the other systems allow dealers to tier pricing, access and permission levels,” says White. “We don’t allow them to do that. If you show a price on our system, every single buy-side customer gets to see that price at the same time.”

The dealers who spoke to Risk.net for this article also argued the BondCliQ system is preferable to the sort of pre-trade transparency mandated by the revised Markets in Financial Instruments Directive (Mifid II) in Europe. “The exact implementation of pre-trade price transparency under Mifid II is not really going to help the market. It’s a case of the regulators not really understanding the dynamics of the credit market and trying to make it act like more liquid products,” says the credit trader at the second participating dealer. “This [the BondCliQ service] could be part of the regulatory solution to pre-trade transparency in the US.” ■