Where European bond traders and their counterparties are sat could affect the size of bid-ask spreads they are shown, thanks to a split in disclosure regimes between the United Kingdom (UK) and the European Union (EU), attendees at the FIX EMEA conference heard in London on 6 March.
The UK and EU are each developing consolidated tapes of bond pricing, but they have different period of disclosure for trades of different sizes, meaning a trade might be published on one tape before it is published on another.
At the FIX EMEA conference, Matt Coupe, co-chair of EMEA Regional Committee, FIX Trading Community, and Vincent Grandjean, founder and CEO of analytics platform, Propellant.digital, presented multiple examples of imbalanced disclosure between the two regimes.
Angela Lobo, head of electronic trading sales EMEA at Jefferies, noted that bond traders should be increasingly aware of the differing impacts of transparency regulations across UK and EU markets.
She explained, “Traders should be aware that bond pricing could vary significantly based on disclosure profiles in the UK versus the EU,” and emphasised that “this bifurcation creates nuanced liquidity challenges.”
Mike Poole, head of fixed income trading at Jupiter Asset Management, also highlighted that varying transparency requirements have significantly altered liquidity landscapes, “Firms should adapt their trading strategies to reflect varying transparency requirements.”
“It will be important for traders to understand where they are located and their counterparty is located and the implications for the timing of price and volume publication,” said Lobo. “For a high yield bond, looking at the data [presented by Matt Coupe and Propellant] it suggests that a €4.5 million high yield bond trade will be printed on the tape in 15 minutes if it is in Europe, and in two weeks if it is in the UK. And potentially if it is a US counterparty the price will get published in 15 minutes and then the volume will be published in six months. That is going to impact the price.”
As risk-taking market makers need time to trade out of positions they have taken on for clients, they typically prefer longer disclosure times and the increased risk of early disclosure typically requires them to increase the bid-ask spread they offer to buy-side bond traders, in order to increase the margin that might cover that risk.
Poole also noted that the separation of price and size in itself created problems.
“If you have a high yield bond trading and you can see the price, but you don’t know if it is for a trade sized at €200,000 or at €20 million, that is going to freeze up the market. More transparency is generally good, but if transparency leads to ambiguity, and that leads to freezing up risk provision, then it is bad, and that’s where the UK’s FCA has listened to the buy side and the sell side, and produced a transparency ratio to benefit the market in the near term, and allow for further discussion.”
Traders also need to consider the structure of a counterparty, Coupe said, as know the difference between being established in one jurisdiction to having a branch in that jurisdiction makes a difference to where they are required to report the trade.
“A really important point is ‘know your counterparty’ because if you are trading with a [European] dealer who is branched in the UK, that trade’s print is going to hit Europe under its transparency regime,” he warned.
Propellant, whose analytics platform had enabled much of the debate through real-world examples flagged this a live issue.
“At the moment about 10-15% of activity is reported on both sides,” said Grandjean.
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