Fixed Income special report

October 2011 - sponsored by: MTS, MarketAxess, S&P Capital IQ

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Locking in Liquidity

Once considered a safe place to park money, fixed income lost its luster following the credit crunch, and is taking a beating again as national debts increase and European sovereigns face default. Nevertheless, this volatility is leading to increased trading volumes-especially in more reliable, liquid assets as investors seek safe havens-with corresponding increases in demand for market data.

However, simply moving assets won't solve fixed income's more fundamental challenges: While a wealth of data-from real-time prices and indexes to ETFs based on bond indexes and historical trade data-exists for more liquid instruments, challenges still remain around sourcing data for less liquid assets, which carry the most risk and require model-based valuation processes to price. And while moving over-the-counter assets onto exchange-like platforms and swaps execution facilities will eliminate some counterparty risk and lead to more-and better-quality-data overall, market participants aren't convinced that this will solve the more complex requirements of the fixed income markets.

"Putting something on-exchange doesn't mean there will automatically be appetite for it," says Lee Sanders, head of fixed income and money markets for London and Paris, and head of fixed income in London at AXA Investment Managers, adding that even if demand exists, other factors-such as clearing costs-could make this an unattractive option and drive firms to alternative trading models. "What is important is liquidity... we just want reliability of being able to buy or sell."

But the good news for the industry is that data is very much in demand, and consumers are being more critical about the source and credibility of market data as they seek out benchmark, executable prices and supporting information to aid transparency.

And even better news, much of the demand is being driven by stricter controls around trading and risk. "The demand for market data and related information is an offshoot of the need to better understand holdings, counterparties, liquidity positions, and financings," says John Jay, senior analyst at Aite Group. With these and other efforts around data quality and availability, the market is well on the way to removing risk and locking in liquidity.

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