Buy Side Clamors for Data

Terry Flanagan

Amid increasing demands from financial institutions and regulators for liquidity information in the aftermath of the financial crisis, sell side and buy side institutions have been clamoring for information on derivatives for risk management, product control, compliance and trading purposes, while regulators need information to assist them in monitoring financial markets around the world.

Markit, a pricing and post-trade services company for credit derivatives and other asset classes, provides liquidity metrics for all credit default swaps (CDS), evaluated bonds, loans and asset-backed securities included in its pricing services.

The aim is to give market participants a comprehensive view on the liquidity of financial assets across fixed income markets. The metrics, launched in 2010 for CDSs and evaluated bonds, include a range of liquidity indicators.

“When liquidity started to be a hot topic a few years ago for risk management, there were no metrics,” said Ed Chidsey, global co-head of data services at Markit. “If we could provide metrics—i.e., number of books of record, number of indicative quotes, number of unique dealers, bid/ask spread—they could all provide a relative measure of liquidity.”

The liquidity metrics for CDSs consist of bid/ask spread data, market depth information and liquidity scores for CDS entities covered by the firm’s end-of-day pricing service. The liquidity scores are calculated from market depth information, bid/ask spreads and freshness of data contributions.

Accurate, reliable and transparent metrics enable market participants to assess the liquidity of instruments across an entire asset class.

“We packed that into an algorithm which we called a liquidity score for that particular name, thereby assuring that we are providing full transparency, not a ‘black box’,” Chidsey said.

Data is an underlying theme for buy-side institutions.

The primary drivers are the surge of regulatory reforms designed to protect concerned investors, increasing global competition in acquiring new clients and supporting increased demands from existing clients.

“Over the last few months, we have observed a general trend in specific projects to provide information to meet new regulatory requirements, and to deliver appropriate information to the client on the investment decisions made on their behalf,” said Gina McCafferty, principal and co-head of intelligence research practice at research firm Investit, in a blog.

Markit provides valuations for the credits that trade in the CDS market, drawn from numerous financial institutions including inter-dealer brokers, electronic trading platforms, major market makers and many significant buy-side firms.

The company cleans and aggregate over one million data points daily using sophisticated algorithms to create a single, independent and reliable data point for each credit. This data helps financial institutions mark their books to market, measure risk and monitor portfolio positions.

“We think about data in terms of a value chain, in the form of a pyramid worth four levels,” said Chidsey at Markit. “The levels, from bottom to top, are acquisition, aggregation, derivation and analytics.”

The third level—derivation—is where Markit takes “streaming quotes and indicative information and to create another product [Liquidity Metrics]”.

The liquidity scores calculated by Markit range from one to five, where one indicates the highest level of liquidity.

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