Market operator and data provider, Bloomberg, has been fined US$5 million by US market regulator the Securities and Exchange Commission (SEC) for failing to disclose that prices in BVAL could sometimes be based on a single data point.
Bloomberg’s evaluated pricing service, BVAL, provides daily price valuations to its customers through paid subscriptions and licenses. According to Bloomberg, BVAL valuations are based on sophisticated, proprietary, algorithmic methodologies, and it leverages a global team of hundreds of experienced market specialists – evaluators, pricing specialists, and financial engineers – to create and maintain the algorithms and the data incorporated into the algorithms.
The BVAL score, is designed to gauge the amount and consistency of market data used in BVAL’s models with respect to a particular BVAL price, measured on a scale of 1 to 10 with changes made dynamically as additional market data becomes available for a particular instrument.
Pricing services like BVAL are widely relied upon for determining the value of thinly traded or more complex assets.
Bloomberg evaluators can also use the Evaluator Input Tool (EIT) to incorporate into BVAL’s algorithms a single data point about the target security, such as a broker quote that may not have been automatically incorporated by BVAL. At times during the period the SEC examined the service, EIT was used by evaluators to incorporate data into the observed comparables algorithm, which in certain circumstances could result in BVAL prices that, in the time period shortly after the incorporation of that single data input (such as a broker quote), were largely based on that single data input. These circumstances were generally limited to the pricing of certain illiquid, thinly traded securities for which little observable market data exists, and which would be assigned a lower corresponding BVAL score in the BVAL data provided to customers
In its judgement the SEC noted, “It is critically important for pricing services to provide accurate information to their customers about their valuation methodologies … Investors and market participants use independent pricing services, such as BVAL, as a reference point for valuations or to facilitate price discovery for thinly traded or difficult to price assets, including many fixed income securities.”
It continued, “Bloomberg’s failure to disclose that BVAL prices for fixed income securities could, in a limited number of circumstances, be based on a single data input such as a broker quote rendered Bloomberg’s disclosures about its pricing methodologies, in light of the circumstances in which they were made, misleading. During the relevant period, Bloomberg, for a very small fraction of total reported valuations, determined the prices of certain fixed income securities based on uncorroborated single broker quotes, with correspondingly low BVAL scores reflecting limited amount and consistency of market data, and did not inform its customers that the use of EIT could result in valuations based on single broker quotes. This omission caused Bloomberg’s disclosures about its methodologies to be materially misleading.”
