In the current market if a trader wants to find out information on a bond, whether they are buying or selling, or creating a portfolio, they have a wide variety of sources, from data service providers to counterparts in the market who price a bond at a certain level. Other value added services have also appeared, including various composite price feeds, which are meant to take into account the data service providers’ and the counterparties’ pricing into account, and put them all into some type of intelligent price, usually by bringing AI technology or analytics to that data.
As ICMA rightly point out in their recent paper, pre-trade information on bond pricing is currently non-standardised and often misunderstood. Now is the time for the industry to define those standards and definitions.
The user is almost always concerned about price and liquidity — those are the two main pieces of information. Interpreting this barrage of information, they are faced with everything from FYI pricing — reference pricing — to indicative positions and orders, to axes and runs (that come from counterparties), where there’s meant to be some additional level of commitment in price, all the way to firm pricing which is the highest value data — that you can click to trade at.
Where’s my price?
When the firm prices are all outside of the spread, while indicative prices are in the middle, you don’t know what the true price is. The human trader — not a machine — has to make a judgement call. The pain point arises when a user sees a price with some level of commitment (such as an axe) on the screen, but once the user engages directly, the counterpart may not honor the commitment. Perhaps their position or the market has changed, but now both have wasted time and worse, revealed intent to the market.
So, the trader must deal with a wide variety of orders with varying commitment and trust on the other side. This makes the trader’s job very difficult.
Many in the market, especially more tech-driven ETF market makers, think that if a price is firm, it should be firm, you shouldn’t be able to cancel that order. There are lots of times when you engage on a firm price, and the owner say the market’s moved and they have a last look and won’t execute.
Making everyone’s lives easier
Opaque data with unclear commitment has been a cost of doing business, but we now have the opportunity to standardise data in an ecosystem. In an environment where the market operator doesn’t own the data, or have to stand behind the data, by stepping back, you create an opportunity for everyone else to step forward.
You can set the rules in place that standardises the data that the trader can see, on screen or in their API feed. That’s why we are going to clearly define what each type of data will be — what does an axe mean, what does a run mean, what level of commitment does the originator need to have on that price?
At LedgerEdge, we are not requiring participants to only submit firm orders, but we are labelling all data and ensuring that every user knows exactly what to expect from a data point they see in the market.
Industry agreed definitions
These will be aligned with the new ICMA standards. ICMA have done a good job through their Axe Standard Working Group on definitions, a guide to best practice and in some cases, new terminology, to better and more accurately describe the categories of advertisement of bond buying or selling interests.
At LedgerEdge, we also believe in the need to clearly define data and moreover, incentivise quality data. We will continue to support market wide initiatives for data standardisation.
If the market doesn’t recognise the need to standardise data, traders will continue to come to the market with mismatched expectations which could lead to missed opportunities for trading. Worse, without clear definitions, this could be a case of misleading potential counterparties or creating false markets.
If the market doesn’t solve this growing issue now, it will require a much more blunt, heavy handed regulatory approach. This ICMA self-organisation is healthy and welcome.