Bids and offers ain’t [fixed income] noise pollution.

Bids and offers ain’t [fixed income] noise pollution.

[Voice, fixed income information noise]
Sep 13, 2017 9:44:00 AM
Picture of David Askin

David Askin

(Authors Note:  First, our heartfelt apologies to AC/DC for making reference to your 1980 song "Rock & Roll Ain't Noise Pollution" in a fixed income piece.)

It’s a Brave New World

In the Good Old Days, the bond market was a kinder, simpler place.   

Those of a certain age might remember Monroe Calculators, flickering Quotron screens that only displayed current quotes for US Treasury bonds and Homer and Leibowitz’s “Inside the Yield Book”, which changed the bond world forever, by creating the science of bond analysis.  All trading was done over the telephone.  In “Liars Poker”, Michael Lewis regaled readers with tales of default-free GNMA ARMs trading in 3-point bid/offer spread markets.  There was minimal transparency and a large information asymmetry in favor of the dealers.

Change was underway, however, in the form of new instruments and analytics tools; things such as CMOs, ABS, Bloomberg terminals, OAS, CDS and CDOs, to name but a few.  Mathematics, quants and technology were applied to virtually every corner of the fixed income market.  Eventually, these factors produced a transformation that has strained the capacity firms and the professionals they employ to keep up with the explosion of available data and information (which are not quite the same thing) and thereby to do their jobs effectively.

 

The Best of Times or the Worst of Times?

There now is so much information available, owing to the growth in messages, bid lists, axes, indication of interest, portfolio holdings data, social media and so forth.  Unfortunately, much of it is unstructured, variously formatted, unaggregated and not customized to fit the needs and strategies of individual bond market participants.  This, in turn, makes it difficult to extract readily the signal from the fixed income information noise. 

Markets have become difficult.  Volatility and bond yields are low.  The yield curve is flat.  These are headwinds contributing to narrower margins and reduced trading volumes.  When combined with the absence of dealer balance sheets and fewer operating as principals rather than as agency traders, sourcing liquidity and executing on desired trading and investing strategies has become more difficult. 

All this should put a premium on access to information.  Instead and somewhat paradoxically, some dealers are cutting off customers who do not do enough trading business to justify the time and effort required to service them.  Similarly, many buyside firms are reducing rather than increasing the number of counterparties with which they do business.  To reduce the noise, people are reducing the amount of information they consume.

 

A Bridge Too Far?

So, what can be done to bridge the gap, informationally speaking, between where we are and where we need to be?  

In its role in democratizing widespread access to vast quantities of unfocused information, technology is the proximate cause of the problem.  At the same time, well-designed, customized technology also offers the solution.  Yet, all tools do not meet the criteria for managing the fixed income information noise.  

There is a huge difference in terms of effectiveness and operational efficiency between a tool that says “define what you are looking for based on attributes, relative value and strategic fit and I will find and deliver it to you in a way that suits you” and one that says “I will show you everything to which I have access, so that you can then plow through it all in the hope of finding something that might suit you”.

 Here we offer some criteria worth considering in this regard.  These are meant to be representative, rather than exhaustive.

  • Configurable
  • Consistent with mission-critical workflows
  • Timely
  • Flexible
  • Intuitive and easy to use
  • Cost effective

 Large, fixed platforms are difficult to scale.  They seldom work as well as they should.  Individual firms’ informational and functional needs are varied, even though they might resemble those of others.  Configurable solutions that are consistent with how people work, enable high value-add information to be delivered that fits end user requirements and the ways in which they operate.  Software should fit people, not the other way around.  Ideally, users get what they need in a timely fashion, in a form that is easy to digest and based on the criteria that they set.

Flexibility, especially in the ability to make needed changes to information flows is essential.  Finance is a dynamic business.  Yesterday’s hot ticket can be rendered obsolete tomorrow.  Information tools that can be readily modified, expanded and improved upon add value.

Finally, the information tools must be easy to use.  Adoption rates must be high on an ongoing basis, to justify the cost.  A tool that no one uses is noise. 

Final Thoughts on ATSs and Multiple Disparate Solutions

First, ATSs. 

The electronification of fixed income is all the rage.  The use of electronic trading over voice in fixed income (mostly corporates) is growing.  Many ATS venues provide information services to supplement trade execution.  As good as some of these functionalities can be, they nonetheless are subject to some limitations. 

Virtually everything a given ATS does has a laser-like focus on driving more execution to that site.  You will not see valuable information about a bond on Platform A because of its being quoted or traded on Platform B.  Effective traders and portfolio managers need a holistic view of the entire market, rather than a limited one.  In addition, there are so many electronic trading protocols available that no one can monitor them all in real time.  Thus, much information is still wasted and trades missed when something you cared about was available but you did not see it or saw it too late.  A good trade opportunity for you that gets executed by someone else is an opportunity lost.  Finally, most of the activity on electronic platforms is for highly liquid, low-margin bonds.  Less liquid, higher-margin securities still trade primarily via voice.  So, you must go elsewhere for information on these.

Finally, as to disparate solutions. 

There are many tools that do one or two things well, whether it be data aggregation, data filtering, message parsing, order matching, alerting and so forth.  Requiring people to master and use many different systems is a bit like the Old Testament story of the Tower of Babel.  Failure is likely.  And expensive.

For better or worse, business and compliance/regulatory pressures continue to grow.  They all point in the direction of the aggregation, transparency, centralization and uniformity of a firm’s information.  This trend is not likely to reverse itself anytime soon.  It is imperative to manage the noise


Technology can solve the problem, but should you buy a product that is already on the market or build a customized tool inhouse?

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