Q&A: Transparency Needs Make Bond Markets Tick

IMD: How has better use of market data and other information created a more stable fixed income trading environment since the credit crunch? How can data contribute to ensuring a stable and profitable fixed income marketplace in future?
Linwood: As more trading shifts to electronic platforms, more market data has become available, mirrored by a rise in questions about how data is produced—for example, whether prices are firm, indicative request-for-quote prices or composite—to prioritize the quality of data, which ultimately depends on the quality of the source execution venue. MTS benchmark prices come directly from our trading platform covering the European government, quasi-government and covered bond market. Quality is assured by the number of participants, the trading volumes on the platform, and the fact that all prices are executable.

Market data plays an integral role in securing an efficient, transparent fixed income market for the future, but vendors must continuously create new datasets and products—both real-time and historical. To this end, we developed MTS Live, an ultra-low-latency, un-netted tick-by-tick datafeed of every price in the market, that represents a significant step forward for European electronic bond trading in terms of the depth, quality and quantity of data. This provides more granular data and greater transparency, but also more flexibility in what our participants can do with this data, which is backed up with over a year of historical tick data, enabling participants to back-test strategies to analyze their performance against real market conditions, as well as for research.

IMD: What are some new uses of data to support bond trading—or additional datasets and contextual data that provides indicators of the fixed income market? How is this contributing to demand for fixed income and related data overall?
Linwood: Use of market data in the fixed income markets has, until recently, largely remained unchanged. But with new regulations and further electronification of the bond markets, all institutions—buy-side and sell-side—are hungrier than ever for market data. Real-time, pre-trade price data remains essential for buy-side price discovery in fixed income. This has always been the case, but we have seen a significant uptick in demand for this type of data during the last year as the eurozone crisis reached its peak. To meet this demand, MTS and other technology providers are developing new, innovative solutions, such as our MTS Prime platform—a regulated, orderly electronic all-to-all market for credit, including corporate, financial, covered and SSA (supranational, sovereign and agency) bonds. More electronic trading on platforms such as MTS Prime will produce more market data, and—providing the focus is placed firmly on quality and accuracy when sourcing the data—this will drive more profitable trading opportunities for market participants.

IMD: Where do you see opportunities to adapt strategies and technologies from high-frequency trading for fixed income? Are fixed income markets and data suitable for these strategies, and how would this affect data needs where some assets remain illiquid and depend on end-of-day valuations?
Linwood: Fixed income markets are definitely ready for low-latency data, and banks are embracing algorithmic trading for fixed income. We developed MTS Live directly as a result of demand for low-latency data. We predict that the move to a more equities-like market will be a staged approach—it has already happened in European government bonds, and MTS Live has been very well received. SSAs and covered bonds will be next, followed by the larger bonds of frequent issuers in the industrial, auto, chemical and technology, media and telecom sectors.

IMD: How are marketplaces, data vendors and evaluated pricing providers meeting the needs of traders, investors and risk managers with more timely, accurate fixed income data—especially for less liquid, harder-to-price assets?
Linwood: In fixed income, if an asset is illiquid and harder to price, it is generally a small issue, sub-investment grade, a structured note, or from an issuer that does not have naturally comparable peers. Evaluated pricing will always be needed for these bonds. With the pace of evolution in the fixed income market increasing all the time, real-time prices are needed more than ever. Evaluated pricing must move to real time to keep pace with demand. Businesses need real-time, high quality data through the trading day. Evaluated price providers take data from numerous sources, and sell-side trading desks are a major contributor of information. However, trading platforms like MTS Prime for credit will open up exchange-type, order-driven trading to the buy side, producing new liquidity and unique market data.

IMD: As fixed income becomes more transparent, liquid and commoditized, spreads and margins tighten, and industry headcount declines, will demand for fixed income data increase or decline overall—and how can data providers, brokers and markets leverage it as a competitive differentiator?
Linwood: Demand for data will only go up. Fixed income trading will move onto exchange or MTF platforms, in the same way as equities, currencies and commodities. By its very nature, electronic trading is driven by automated trading algorithms, fueled by pre- and post-trade market data. It is vital for the future of the market that electronic fixed income trading facilitators such as MTS continue to work with the buy side and sell side and introduce new markets and products, as we have done with MTS Live for our participants, and MTS Prime for credit and the buy side.