Buy side unconvinced of corporate bond streaming benefits

Direct price-streaming for corporate bonds is struggling to make the impact electronic trading has had on other markets—despite renewed efforts from dealers, who have offered streaming in some capacity for years now.

Asset managers have long complained about the lack of quality pre- and post-trade information in corporate bond markets—specifically, the absence of a consolidated tape for traded prices in Europe, and, more generally, the unreliability of dealers’ pricing indications. 

Now, the availability of pricing feeds that link directly into buy-side trading systems promises a solution. But buy-side firms say their usefulness, so far, has been limited.

“People are really talking about it a lot, but in practice it’s taking a bit of time,” says Inés de Trémiolles, global head of trading at BNP Paribas Asset Management. 

When we tried clicking on a streamed price, most often the other side was not there

Inés de Trémiolles, BNP Paribas Asset Management

Direct streams have been limited by the bonds and sizes banks can price with algorithms, says Trémiolles.

As banks struggle to provide accurate, live pricing for thousands of bonds at a time, streamed prices can have a last-look element to them. Giving dealers a chance to adjust prices before execution makes the streamed prices more akin to indicative ones. 

While liquidity providers in other assets, such as foreign exchange spot or government bonds, can offer firm, click-to-trade prices, streamed corporate bond prices are liable to move a lot when it comes to execution. 

If banks fail to update streams as markets move, the price the buy side sees and tries to execute on might already be stale. Prices are dependent on trade size—banks may charge more for larger blocks than those already on their trading books, or that could prove challenging to sell once they buy from a manager.

“It hasn’t been very useful,” says Trémiolles. “When we tried clicking on a streamed price, most often the other side was not there.”

No-tomation

Without consistently accurate streams, buy-side firms can’t be sure they’re executing at the best price—or reliably compare feeds from dealers with each other or with what they see from request-for-quote (RFQ) responses on platforms. It also frustrates attempts to increase automation in the sector. 

“Until we get a 100% guarantee that what they’re showing is the genuine price that they want to trade at, for us it’s just another input that we take into account, and shouldn’t be the only input to consider,” says Sarang Kulkarni, lead portfolio manager of Vanguard’s Global Credit Bond Fund. 

“It will enable a lot more automated trading on our side when you get that clarity and know that you’re going to get the price you see.”

In theory, direct streams could cut established trading venues such as MarketAxess or Tradeweb out of the process. 

But while buy-side firms have been less willing to put large numbers of dealers in competition for every trade to better control their trade information, having direct streams is unlikely to displace venue volumes, says Venky Vemparala, global product manager for fixed income at EMS provider FlexTrade.

Corporate bond streams have not been useful for valuing funds, for example, says Kulkarni, as the firm prefers aggregated figures that come from more diverse data points.

“We always come back to the view that having scrubbed average prices from one of the established providers is much better than taking direct feeds from a single counterparty,” he says.

Value proposition

The economics of direct click-to-trade arrangements also remain unclear. Dealers could potentially pass on what they save from not having to pay platform fees, but they may also lose out from not seeing buy-side requests. 

MarketAxess, for instance, charges a transaction fee as high as 3 basis points per million euros or dollars traded on European and US high-yield bonds, depending on a bank’s pricing plan. Fees on US investment grade bonds are smaller than a basis point.

John Sullivan, global co-head of fixed income trading at Norges Bank Investment Management, argues the dealers already discount prices for certain firms on platforms, effectively paying the buy side to see its flow. Streaming would remove information the sell side receives from RFQs, even if they don’t win the trade, but it’s unclear whether any benefit to the buy side would outweigh a pricing advantage.

Click-to-trade is not only about actual trading. If the buy side pushes the dealers to stream firm quotes, even if they’re size-shy, you’re creating a pre-trade price transparency ecosystem

Venky Vemparala, FlexTrade

“That information is worth something to them,” says Sullivan. “If I’m acting on a stream, I can keep that information to myself, so there’s value in that. It’s just a question of how much value there is.”

Information leakage works two ways, however, and buy-side participants could still see a pricing benefit from streaming. Corporate bond market liquidity can reflect dealer inventories—and finding counterparties for large positions can be a delicate exercise when trying to avoid word spreading of an active buyer or seller. 

Kasper Folke, co-head of global trading at Nordea Asset Management, says dealers will appreciate being able to customize their feeds for select clients they know may be interested in their inventory.

“If they can stream tailored axes and prices directly to us, they’re not leaking information to everyone. They can get more control of the price streams, as we know from FX,” he says. “To a large extent, the largest buy-siders have to drive it and insist it is good for our clients if we trade in a different way.”

FlexTrade’s Vemparala argues the benefits from having click-to-trade arrangements are not limited to an individual manager’s execution or to the potential savings the dealers pass on. The real gain is a more transparent market, he says.

“Click-to-trade is not only about actual trading,” says Vemparala. “If the buy side pushes the dealers to stream firm quotes, even if they’re size-shy, you’re creating a pre-trade price transparency ecosystem. That’s a much larger goal than just being about a portion of the tickets executed click-to-trade.”