Sell-side bond trading counterparties price trades according to their clients’ profiles, based on tiering systems. That model directs the pricing of risk according to the level of business that dealers see from their buy-side counterparties. This model, essentially offering bulk discounts and preferred pricing, is not universally used by all counterparts.
Non-bank liquidity providers place less reliance on tiering, buy-side sources report, and this can create a more consistent flow of liquidity to buy-side desks.
The consumption of directly streamed prices from counterparties is the key challenge.
Firstly, the bids/offers/axes need to be set beside other pre-trade liquidity indicators in order to assess execution opportunities fairly and clearly with one another.
They also need to be engaged with, so that good matches can be made and traded against. The bond market is a principal trading environment, rather than an exchange-member model as found in equities. As a result, bilateral trading is the order of the day, even where there is a model for mediating orders and counterparties via a trading platform.
Finding the right mechanism to align orders is therefore crucial, not only from a workflow perspective, but also from a regulatory point of view so that best execution obligation are met and reporting/processing rules are followed effectively.
Engaging directly with streamed prices on the trading desk requires the right execution software with the capacity to process high volume price feeds and a method of allowing order to be matched without triggering rules around trading venue perimeters, which would require desktop technology to be regulated as a venue.
An alternative is to use trading venues directly, to support data streaming and execute against it. While dealers are keen to reduce the costs of their exposure to platform fees, direct streaming via a platform reduce the net cost of connectivity and distribution, and according to the platform, can deliver a more standardised interface for each dealer.
To optimise execution strategies, this approach can also allow traders to bring click-to-trade for dealer streams into a workflow that includes other trading protocols from portfolio trading to all-to-all models.
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