Looking for pricing information on equities? Check the New York Stock Exchange or Nasdaq. Would you like to know more about options prices? Take a peek at the American Stock Exchange. Need to find prices for U.S. Corporate Bonds? Hmmm ... life just got a little trickier.
The U.S. Corporate bond market has always been a challenging area to locate accurate market data. Because corporate bonds are primarily traded in an over-the-counter marketplace instead of on an exchange, prices have not been in public view. Corporate bonds are traded between two parties privately, and often inconsistently.
In fact, a very small fraction of bonds makes up a large percentage of the daily trading volume in the market. In addition, corporate bonds have a range of values, depending on the date of maturation and credit rating. To complicate things further, those values are labeled as spreads, or risk premiums over treasury benchmarks, instead of monetary values.
"If everyone was trading the same bonds, you could see the prices before and after trades, and the market would be transparent," explains Miranda Mizen, a senior analyst at TowerGroup. "But every company in America is issuing its own bonds, so there are many different types. You're not just looking for a market-data price but, instead, a profile."
However, last July, the National Association of Securities Dealers instituted a mandatory system requiring its member firms to report market transactions for certain over-the-counter fixed-income securities, which could then be disseminated into the marketplace. The NASD's Trade Reporting and Compliance Engine (TRACE) is the database of these reports.
While TRACE is not the only source of market data, it has provided an increased supply of information for corporate-bond traders, who already have an extensive array of information to manage. While its total impact is still undetermined, buy-side and sell-side traders can't ignore TRACE and are working to incorporate it into their market-data resources.
"We're seeing what you'd expect to see with any new source of information," explains Douglas Shulman, president of regulatory services and operations at the NASD. "It takes a while for the market to absorb it. Once the market absorbs it, it starts using it. Once it starts using it, others hear about it and try to find creative ways to use that information."
Corporate-Bond Market, Before TRACE
Before the arrival of TRACE, corporate-bond traders used a different technology to obtain pricing information: the telephone. Buy-side traders would call five or six of their sell-side counter parties and find out the best bids and offers for their bonds.
"Before TRACE, there really was not any system for disseminating bond prices to the world at large. There was no repository or method for gathering information from dealers," explains John Ramsay, The Bond Market Association's senior vice president and regulatory counsel. "While there might have been individual systems showing indications of interest, they were not widely available or reliable."
Steve Joachim, the NASD's senior vice president of market operations and information services, notes that the lack of relationships between retail investors and small investment managers, and the large broker/dealers they want to do business with, creates an absence of corporate-bond-pricing information for those market segments.
The TRACE program was established to increase investor confidence in the corporate-debt market through transparency. "TRACE enables the retail investor and small institutional investor to get fair and equitable prices that they didn't have access to before," Joachim says.
NASD's Shulman says that the program is being released in phases to ensure that the added transparency doesn't negatively affect liquidity. The NASD currently disseminates all investment-grade bonds with an original issue size of $100 million or more and rating of at least A3/A, as well as 120 bonds rated "triple-B," which is roughly 4,650 bonds. While TRACE dissemination does not encompass all corporate bonds, Shulman notes that it does provide dissemination for 64 percent of the investment-grade market.
Corporate-Bond Market, After TRACE
With new information in the corporate-bond arena, market-data vendors are clamoring to provide the most valuable package for disseminating the TRACE data to existing and potential clients.
According to the NASD at press time, vendors currently paying to redistribute the NASD feed include Bloomberg, MarketAxess, Reuters and Moneyline Telerate, with the expectation that more will soon be added.
However, many industry insiders say that the challenge is not only redistributing the TRACE data, but incorporating the new information into the abundance of resources already present on a trading desk.
Michael Allen, HSBC Securities' managing director and head of corporate-bond trading, says that real estate is an issue when considering technologies. "How many things can you pay attention to at one time?" he asks. "The technologies that have evolved for corporate-bond traders are very worthwhile, but I'm not sure anyone has gotten their arms around the best way to implement it. We're trying to refine our house system so we can feed all the other systems into it."
New York Life Investment Management's Don Serek, who heads the corporate-bond trading desk, explains that vendors must differentiate themselves in a market where data is becoming a commodity. "They must continue to improve their technological systems so that they are offering their clients the most competitive system available," he says.
In addition, Serek notes that added value can go a long way in building a partnership with a corporate-trading desk. "Vendors also need to ensure that they are bundling the appropriate accessories around it, such as research and electronic-trading capabilities," he says. "Imagine having to open up three different systems each morning: one for TRACE, one for research and one for electronic trading. It's not that big of a challenge, but it is cumbersome and takes up more real estate on the trading desk."
Market-data analytics are another added value, especially for risk-management purposes, explains Ralf Roth, a managing director for the global markets business at Deutsche Bank, heading up electronic commerce for fixed income. "News and analysis is vital. You need to be concerned about credit risk in corporates because a corporate company can default and your exposure can be enormous," he says. "It helps to have tools to slice and dice the data to show different perspectives on your exposure."
The Cream Of The Crop
The vendors that are mentioned most frequently when discussing corporate-bond market data are Bloomberg, for its broad data, analytics and communications and MarketAxess, for its incorporation of electronic-trading capabilities as well as its real-time TRACE feed and analytics engine, called BondTicker. However, it is also generally acknowledged among industry participants that more competition is inevitable, since no vendor does it all.
"Over time we will see who stands up and who doesn't as competitors come into the marketplace," explains HSBC's Allen, noting that despite the industry's thought that technology would govern the corporate-bond trading desk, phones and e-mails still rule.
"Bonds are a relationship market. If you make all of a trader's desk electronic, you've just made everyone look the same," says TowerGroup's Mizen, adding that vendors need to examine niche or cross-market products to move into the corporate-bond marketplace.
However, Allen adds that there is always an opportunity for new entrants into the marketplace, as long as they're worthwhile. "With the consolidation of this business, there are a lot of entrepreneurial personalities with tremendous talent who have no place to go. They will find ways to add value in a business where they have familiarity."
|The Recipe for TRACE Market Data|
Step 1-Report prices for all OTC-TRACE-eligible securities within 75 minutes.
Step 2-Reporting bond information for TRACE can be done in multiple ways, according to the NASD:
Result: TRACE market data for corporate-bond traders via market-data providers!
Source: The NASD