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Market Structure & Trends

Pre-Trade Price Transparency – It’s About Time

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Pre-trade price transparency has been an ongoing challenge for the Fixed Income market. There are distinct personas, millions of bonds, multiple asset classes with distinct features and bonds with unique structures and cash-flows. The complexity is even more pronounced in the Municipal Market as the SEC highlighted in its 2012 Report on the Municipal Securities Market. This challenge, once seemingly insurmountable, has been confronted and a solution is at hand. It’s about time – in more ways than one.

Challenges for the Fixed Income Market

Achieving pre-trade price transparency in the Fixed Income market has been significantly more challenging than in equities or other exchange-traded asset classes. There are a number of factors that have contributed to Fixed Income’s “systemic blind spots” such as the size of the market, the complex and opaque market structure, and rules around trade reporting.
Compared to just a few thousand public equity tickers with generally standardized characteristics, Fixed Income, comprised of millions of active securities globally, is subdivided into many asset classes with distinct features and cashflow profiles. Mortgage-Backed Securities look nothing like Municipal Bonds or synthetic Credit Default Swaps referencing corporate entities. These are but a sampling of the diverse and disparate Fixed Income landscape.
Given the size and idiosyncratic attributes of Fixed Income markets, matching buyers and sellers willing to agree to a fair price and transact on a specific security at a given time is challenging and is one of several factors leading to securities trading infrequently. Add to that the complexity of the market structure exemplified by the multiple venues where bonds are quoted requiring market participants to be connected to an ever-growing web of exchanges, ATSs, trading protocols and streaming quotes as well as monitoring the traditional flow of thousands of daily messages and chats with trading counterparties.
Trade reporting is not timely or does not exist in certain asset classes. Unlike equities, where you can look up a price of AMZN or AAPL in seconds, knowing the fair market value of a Fixed Income security is time consuming (at best) and, in many instances, market participants do not have confidence they are operating with comprehensive and current information.
In the Municipal Market, the SEC, in its 2012 Report on the Municipal Security Market, highlighted the need to address this issue speaking to the need to improve pre-trade price transparency through amendments to or creation of rules. With a solution at hand, rule amendments and rulemaking are not necessary.
Finally, the pre-trade price transparency challenge is exacerbated by the unique needs and use cases of the diverse market participants – Buy-side, Sell-side and Service Providers.

Pre-Trade Transparency for Diverse Market Needs

The approach to meeting these challenges is much like other disruptive technologies that helped solve challenges once thought technologically unsolvable – revolutionary thinking and, in this case, applying that thinking to the democratization of price transparency across the Fixed Income ecosystem. To achieve this, we work with a wide range of market participants – Buy-side, Sell-side and Pricing, Audit and Accounting firms – to eliminate information asymmetries, save time researching fair values and, most importantly, instilling confidence that users are executing at the best levels.
SOLVE has developed state-of-the-art message parsing tools allowing for the digitization of quotes and organizing fragmented lists of “bonds that are currently actionable” in real-time. For clients opting for parsing their firm’s messages, users can visualize trends for individual bonds or larger cohorts or asset classes, with attribution and click-thru access to the underlying messages. For others, SOLVE offers price transparency with anonymized quotes contributed by many of our clients.
As noted above, the Fixed Income market is comprised of many asset classes. To that end, SOLVE Quotes covers Securitized Products (ABS, MBS, CLO, Agency and Non-Agency paper), Corporates (High Yield, Investment Grade, Emerging Markets, Sovereigns), Municipals, Syndicated Bank Loans, Convertible Bonds and Credit Default Swaps.
For market participants, we know the Buy-side is inundated with daily messages from Sell-side counterparts with lists of bonds available for sale, securities that the Sell-side is making one- or two-sided markets in, lists of bonds that the dealers are marketing on behalf of their other Buy-side clients, market commentary and more. SOLVE’s asset manager clients receive close to 300,000 messages per day, most unstructured and free form. An impossible volume of messages for a trading desk to process without having specialized tools.
Using proprietary, state-of-the-art message parsing, SOLVE creates a tangible, competitive advantage for our Buy-side clients. We organize this massive amount of quotes in real-time and provide clients the ability to search and visualize trends for individual bonds, larger cohorts or asset classes by organizing the fragmented lists of “bonds that are currently actionable.”
The Sell-side has its own, unique challenge suffering from information asymmetries. As they communicate bid and offer levels to their Buy-side clients, they risk being outliers compared to other dealers.
To help address this challenge, SOLVE delivers price transparency with quotes contributed by many of our clients. These quotes are, for broader market consumption, anonymized and tiered. Sell-side clients are able to assess where markets are moving in real-time and build confidence around levels they are communicating to their counterparties.
Service providers -- Pricing services, Audit/Accounting firms, Research and similar firms all require price transparency to offer the best services to their customers. They, too, suffer from the same systemic blind spots but in a more pronounced way given these firms are not directly involved in trading and do not have as much access to “market color” compared to the Buy-side or the Sell-side. The result is significant time researching fair values and, even when they have information, uncertainty around if the values are current.
Service providers leverage the SOLVE market color database providing them the ability to level up their product and services and build confidence they are speaking to their customers on a level playing field.

Conclusion – It’s About Time

It is about time for innovation to address the previously insurmountable and unsolvable challenge of Fixed Income price transparency. And, It is about time to create time-saving tools for the diverse user groups within the Fixed Income market to maximize one of their most valuable commodities – time.