Bond-Trade ‘Best Ex’ in Focus

Terry Flanagan

Regulatory emphasis on best execution — ‘best ex’ in industry parlance — is carrying over from equities to fixed income, with implications for the pricing of bonds on alternative trading systems.

“There’s clearly a focus on both sides of the Atlantic on best execution,” Bill Gartland, senior director of evaluated pricing services at Interactive Data, told Markets Media. “Finra’s regulatory guidance at the beginning of the year included best execution as one of the things that they would be looking to make sure is part of all their examinations this year.”

In its 2015 examination priorities letter, Financial Industry Regulatory Authority said that the evolution of fixed income market structure and the related expansion in electronic trading of debt securities has contributed to firms having access to improved data and tools to evaluate best execution and mark-ups. In 2015, Finra will increase its emphasis on reviewing firms’ pricing practices, including whether firms have supervision and controls in place to ensure they are using reasonable diligence and employing their market expertise to achieve best execution.

“People are struggling to find what is the basis against which to make those kinds of determinations,” Gartland said. “Typically, you’ll have enough information to make some assessment about how you did, if not during the exact same moment of time that you did your trades, but at least how that bond traded on the day you traded, We’re expecting that some of the recent work that we’ve been doing on real-time evaluated pricing and how it correlates to the trading activity across different trade sizes will provide some benchmarking in that space.”

In 2015, Finra will launch a pilot program to conduct fixed income-based examinations focusing on trading issues, including related controls. As with other trading examination programs, the fixed income program will focus on areas that complement Finra’s surveillance program. Among other things, the fixed income examinations will focus on the operation of alternative trading systems trading fixed income instruments, books and records, supervision and order execution practices.

“We’re doing a lot of work with a lot of the newer trading platforms,” Gartland said. “They are intrigued by the idea of having a price like ours showing up on their screens for the purpose of providing a viable market that will motivate people to use them as a new trading venue.”

Many of the firms that trade on bond platforms are required to demonstrate that they’re conforming to best execution principles, which places the onus on the platforms themselves to provide executable prices.

“You need to show that the pricing of the bonds that are available on your platform are credible and relevant within the marketplace,” said Gartland. “Given our end of day reputation and our growing intraday reputation, our message is resonating that these prices are a valuable input to help with that migration of the market to these new platforms.”

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