March’s market downturn unveiled long-standing problems with the process for calculating critical net asset values — the value of a portfolio’s holdings for bond mutual funds, credit hedge funds, and fixed-income exchange traded funds. Now, after decades of inertia, bond market participants are calling for changes in fixed income market structure.
Until markets stabilized later in the spring, some credit hedge funds suspended redemptions because they couldn’t guarantee the accuracy of their NAVs, and fixed-income ETFs traded at record discounts.
Reginald Browne, principal at GTS, the largest NYSE market maker, recommended — among other changes — creating a fixed-income securities information processor, or SIP, to distribute aggregated bond market data. Speaking at a recent Securities and Exchange Commission meeting of the Asset Management Advisory Committee, Browne said the proposal would improve the source data for valuations, allow market makers to automate trades, close bid-offer spreads, and ultimately create more liquidity. A SIP is used in U.S. equity markets to consolidate quotes and trades from multiple trading venues.
BondCliQ, a technology firm that centralizes post-trade and pre-trade pricing information for U.S. corporate bonds, said it has a live version of what Browne is talking about. Bondcliq is making its service available through order management systems, such as Charles River Development’s OMS, which is one of the largest. This is the first time that the buy side — asset managers and investors — and dealers will be looking at the same information at the same time.
“We’re just doing what Nasdaq did in 1971, which is aggregating quotes from market makers. After that turnover for unlisted stocks took off,” said Chris White, founder and CEO of BondCliQ, in an interview. (In 1971, Nasdaq initially automated quotations of stocks that changed hands over the counter, similar to how bonds trade today.) “The liquidity issues that we’re having, the NAV issues, all come down to data quality.”
The prices for stocks, which trade on an exchange, are available in real-time. But bonds still trade over-the-counter, meaning a dealer and an investor negotiate a price, whether online or over the phone. As a result, investors, dealers, and others have no central place to find bond prices.
Bond mutual funds, for example, use what are called evaluated prices from third parties such as ICE Data Services. ICE’s analysts and algorithms gather and assess multiple sources of information scattered throughout the market to provide evaluated bond prices to investors, asset managers, dealers, and others. In March and April, as markets cratered and trades ground to a halt, accurate pricing information also disappeared.
Even though no one questions transparency in equity markets, calling for something similar in bonds is still controversial. Asset managers interviewed for this article didn’t want to go on the record on the subject. Some said they didn’t want to alienate dealers they rely on for execution. Others said some in-house traders opposed transparency because it could threaten their jobs.
“In the equity markets, you see trade and quote data, and it’s all regulated,” said Michael Beattie, director of product strategy at Charles River. “In fixed income, institutional traders have to piece together information from multiple sources. The crux of this is, how do you trust the pricing you see?”