The prices dealers quote on electronic venues such as Tradeweb and MarketAxess are indicative and only valid for small-size tickets. The real market for institutional block trades tends to be far from the screen price. The lack of dependable data makes it difficult to agree prices and execute orders quickly, especially during times of market stress.
This was evident during the Covid-19 sell-off in March. As investors rushed to liquidate positions and raise cash, electronic trading appeared to break down. The proportion of bonds traded on the two main electronic platforms fell to 28% in March, from 33% at the end of 2019. At the peak of the volatility, traders reverted to negotiating deals on the phone or via electronic messaging, rather than executing on a platform. RELATED ARTICLES Mifid’s pre-trade transparency is ‘a failed experiment’ Sovereign bond IM increases at LCH Ltd Transparency vs clarity: the Mifid swaps conundrum Own goal: Mifid II reduces transparency in some EU markets
The share of US bonds traded electronically on Tradeweb and MarketAxess has rebounded strongly since then, reaching an all-time high of 35% in August. This suggests traders generally prefer to execute electronically when markets are stable. Improving the quality of screen prices might help avoid another retreat from electronic trading in the next crisis.
Regulators don’t seem to have grasped the problem. In the US, most bond transactions must be reported to the Trade Reporting and Compliance Engine within 15 minutes of execution. In 2018, an advisory group convened by the US Securities and Exchange Commission recommended delaying this to 48-hours for the largest block trades. The US Financial Industry Regulatory Authority took up the proposal last year, arguing that it might make dealers more willing to do these transactions. The plan was put on hold after meeting opposition from several buy-side firms, including Vanguard.
Post-trade transparency is even worse in Europe. Transactions in bonds deemed to be liquid by the European Securities and Markets Authority are subject to a 15-minute reporting requirement. A recent Esma report revealed that only 0.21% of bonds met that test in 2018. The vast majority of trades are reported with a delay, which can be as long as four weeks in some countries.
Esma is reviewing the reporting requirements, but some regulators seem reluctant to push for greater transparency for fear that it may harm market liquidity.
Faced with regulatory reticence, some buy-side firms are trying to tackle the problem themselves. Traders at Pictet Asset Management compared the screen prices advertised by dealers to traded prices. After finding wide differences, they confronted dealers about the problem. “Once they realised we were watching and we were showing them this, their data improved rapidly,” says Carl James, Pictet’s global head of fixed income trading.
Members of the UK-based Investment Association’s fixed income committee have also discussed sending a joint letter to dealers calling for improvements.