Beyond Post-Trade Transparency in Corporate Bond and Credit Markets

What If Real Time Pre-Trade Price Discovery Became a Reality?
by Cubillas Ding,  Medy Agami, March 2, 2012
Case Studies
Global, Asia-Pacific, EMEA, Latin America, North America

Abstract

Driven by the need for greater pre-trade transparency, market participants, especially on the buy side, state that pre-trade transparency technologies can help traders get smarter about the correlation between different information and the bonds they are trading. More importantly, they would help firms to generate alpha and gain competitive advantage.

In a new report, Beyond Post-Trade Transparency in Corporate Bond and Credit Markets, Celent examines a new technology by Benchmark Solutions, in which a price discovery engine generates prices for every TRACE-eligible bond every 10 seconds, bringing the US corporate bond market into a new era of pre-trade transparency. In a world of abundant and rapid communications, where price transparency and electronic exchanges exist for almost every other capital market asset class, it is disquieting that no such comprehensive source of reference prices exists for a market as important as US corporate bonds.

“From our perspective, this innovation by Benchmark Solutions has brought today's US corporate bond market to a pre-trade transparency era. The main analogy that went into building this platform was how to make the system generate the closest possible pricing to what is possible for human traders,” says Medy Agami, Analyst at Celent and coauthor of the report. “The Market Calibrated Framework's model is a continuously self-learning and dynamic system with complex event processing capabilities which could find applications in many avenues.”

Celent anticipates technologies such as what Benchmark Solutions is providing to spur growth and enhance secondary trading liquidity in the markets to which it is applied. Depending on how the technology is positioned, buy side firms could further reduce reliance on sell side-centric prices/quotes. Beyond corporate bond and credit markets, this new technology can be applied to other fixed income markets (such as municipal bonds), as well as OTC derivatives.

“Despite TRACE bringing post-trade transparency to the market, it is worth bearing in mind that not all transparency is equal. There is a colossal difference between the impact of pre-trade and post-trade transparency on liquidity in markets such as corporate bonds and credit,” adds Cubillas Ding, Research Director at Celent and coauthor of the report. “First movers could utilize these innovative pre-trade pricing technologies to identify arbitrage and untapped trends to exploit market inefficiencies and gain profit.”

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

3

Introduction

4

US Corporate Bond Market Overview

6

 

Market Structure and Size

6

 

What Determines Liquidity and Pricing

6

 

Evolution of US Corporate Bond Market

7

 

Industry Transparency Initiatives

7

What Would a Pre-Trade Discovery Mechanism Look Like?

10

 

Algorithm and Functionality

10

Case Study of Benchmark Solutions: Implementation of a

Pre-Trade Pricing Technology

12

 

How Does It Work?

13

 

Market Calibrated Framework Use Case

13

Market Impact

16

 

Application of the New Technology Beyond Corporate Bond and Credit Markets?

18

Conclusion

19

Leveraging Celent’s Expertise

21

 

Support for Financial Institutions

21

 

Support for Vendors

21

Related Celent Research

22

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