Don’t keep up with the Kardashians

Dealers may have gifted the buy side an information edge

oversharing

Oversharing on social media helped Kim Kardashian amass a fortune. But when she Tweeted a selfie with a $4 million diamond ring last year, thieves tracked her down in Paris and made off with it. Kardashian has since vowed to be more careful about what she shares on social media.

Corporate bond dealers might learn something from the reality TV star. These days, banks share a huge amount of proprietary information with clients – from research to inventory levels and indicative prices for securities on their books. New technologies like Neptune, a messaging network for bond traders, have made it easier for dealers to share, and some asset managers have even built internal systems to capture and sort through all this information. As a result, clients know more about what their dealers want to buy and sell – and at what price – than ever before.

That is no bad thing. Keeping clients in the loop can help dealers move risk more quickly and efficiently. But it can also have its downside. Some believe an information asymmetry – where clients know more about the market than their dealers – may explain some of the trading losses suffered by the bond desks of firms such as Goldman Sachs and Jefferies in recent years.

"Asking a market-maker to consistently provide liquidity in a market with no visible pricing is like asking a taxi driver to set the fare before knowing the destination," Chris White, chief executive of ViableMkts, a consultancy in New York, tells Risk.net. "The market-maker is very susceptible to charging $20 for driving someone from Manhattan to the Hamptons."

Rather than blasting out spreadsheets detailing their inventories, axes and indicative prices to everyone on an email list, firms are using new technologies to send targeted information to specific clients

The perils of oversharing could become more pronounced as bond trading moves to electronic all-to-all platforms, where dealers must compete with the buy side and other non-bank liquidity providers to make prices. Such venues typically reward firms that can price risk quickly and accurately. And because spreads are generally tighter in electronic markets, dealers will have less room for error. "With less information, dealers will always have a losing hand," notes the head of bond execution services at a large European bank.

Currently, electronic all-to-all trading accounts for just a tiny fraction – estimated at less than 3% – of US corporate bond volumes, but it is growing fast. MarketAxess' all-to-all trading platform, Open Trading, where the buy side provides nearly 70% of the liquidity, saw record volumes of $167 billion in 2016 – up 83% on the previous year. Tradeweb plans to launch an all-to-all venue for corporate bond trading later this year.

Dealers can see the risks, and are taking steps to both improve the quality of their own pricing data and to control the information they disseminate to clients. For instance, rather than blasting out spreadsheets detailing their inventories, axes and indicative prices to everyone on an email list, firms are using new technologies to send targeted information to specific clients. "Banks will be thoughtful about where they distribute data," says Chris Bruner, head of US credit products at Tradeweb.

Put simply, bond dealers, like the Kardashians, are learning to keep some things to themselves.

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