Evaluated security pricing services, which provide computer-driven or manually calculated marks for illiquid and over-the-counter (OTC) securities, have been a staple of the market-data business for nearly 30 years. In the early 2000s, though, market-leading supplier FT Interactive Data changed the competitive landscape when it acquired rivals Muller Data and Merrill Lynch Securities Pricing Service.
These acquisitions gave the supplier a strong lead in the market, which remains virtually unchallenged today. However, other vendors invested actively in their own services in 2006, focusing on emerging market opportunities (including Europe and Asia) and new, complex products such as structured debt and derivatives. Where once there were few choices, now there are many.
How Are Evaluated Prices Generated?
The vast majority of bonds and derivatives do not trade on exchanges. Therefore, data vendors have developed and refined complex computer models to generate artificial best estimates, or fair values, of bond prices. These are commonly referred to as evaluated prices.
Vendors' techniques vary depending on the type of security being priced. More-commoditized evaluated pricing data, including investment-grade corporate and municipal as well as government bond prices, generally is calculated through use of a computer model with little or no manual intervention. These models are affected by macroeconomic-, sector- and issuer-level data as well as the specific terms and conditions of the individual bonds in the model.
Complex and illiquid issues, such as high-yield bonds, typically are hand-priced, whereby an evaluator calls the desk of a broker-dealer that makes a market in the security (ideally the primary dealer) to get a current valuation. Mortgage-related products generally are model-priced with analytic data and dealer quotes, among other data, as inputs. Vendors typically will incorporate actual trade data into the models and/or adjust the model prices to remain in line with any visible trades in the market.
Another type of evaluated price is what has been labeled a "fair value" for foreign equities. FT Interactive Data pioneered fair-value services in early 2002 in response to the mutual fund market-timing scandals that roiled the industry. Fair-value services aim to eliminate the Europe-to-U.S. time gap by applying a statistical model-driven adjustment to foreign equity prices to account for the activity that occurs after their official close. Reuters launched a competing product through a partnership with agency-broker Investment Technology Group (ITG) in early 2006.