MarketAxess, operator of a leading electronic trading platform for high-grade corporate bonds and other fixed income securities, has introduced a proprietary approach called REXIQ to calculate and analyze execution costs in fixed income securities.
REXIQ — which stands for Reducing Execution Costs — was developed by MarketAxess Research and is the first formal methodology for measuring transaction costs in the less liquid corporate bond markets, according to the company.
While in liquid securities such as equities, there are many widely accepted ways of measuring trading costs, known as transaction cost analysis or TCA, this is a new field in over-the-counter securities such as fixed income.
MarketAxessResearch looked at the embedded costs of trading, consisting of the dealer mark-up plus any fee associated with executing the trade. It was therefore possible to determine the cost of execution by comparing the electronically executed trade to a ‘prevailing market price’ using corporate bond market data from FINRA’s TRACE.
Initial analysis by MarketAxess Research showed the average cost savings of electronic execution for all trades during the period analyzed was 5.2 bps, compared to the calculated to the Volume Weighted Average Spread (VWAS).
For this initial analysis, MarketAxess took a sample of 900,000 TRACE-reported trades over a 24-month period from January 2009 through December 2010.
In the company’s release, Rick McVey, Chairman and CEO of MarketAxess, said: “REXIQ can deliver insight into the corporate bond market to help fund managers meet fidicuary responsibilities. Our research validates the value of e-trading as a tool in achieving transaction cost savings and improved portfolio returns. Using this methodology, we are providing our institutional investor clients with regular, robust analysis of their execution costs to support their best execution requirements.”
Commenting in the same release, release, Alex Sedgwick, Head of MarketAxess Research, said: “The advent of FINRA’s TRACE reporting combined with greater adoption of electronic trading for fixed-income has allowed us to develop an objective approach to examine trading costs in new and compelling ways. Using this data, MarketAxess Research developed the REXIQ methodology – a credible methodology for demonstrable transaction cost analysis, formalizing the value of fixed-income TCA in support of best execution.”
Separately, new independent academic research from the University of California, Berkeley, shows that there are material reductions in trading costs for users of electronic trading tools that source liquidity from a greater number of counterparties.
Authors of the academic paper, Terrence Hendershott and Ananth Madhavan, maintain that increased (auction) participation sharply reduces costs. "To the extent that technology will continue to reduce search costs, these results support the view that even traditional bastions of over-the-counter trading will face strong competition from auction type markets. More practically, the results confirm the value to traders and investors from sourcing liquidity widely and using tools to optimally select a venue. We show that these gains are significant and can materially influence realized investment returns.”