Fixed Income ‘Best Ex’ in Focus

Terry Flanagan

Trade execution was the focus Thursday morning at the WBR Fixed Income Leaders Summit.

The first panel explored best execution — what is it and how far is the market from the ideal standard.

Much of the discussion centered around data and transparency, and a paradox therein. That is, every trading desk wants more data and transparency, immediately, to help their own trading — but those same desks don’t want to provide data and transparency around their own activity, as such a reveal could hurt their trading results.

“As an institutional trader, you want as much information as you can get but you want to give as little as possible,” said Isaac Chang, Managing Director at AQR Capital Management.

The challenge is to find the sweet spot between not enough data and transparency, and too much data and transparency.  

Chang noted a tenet of Econ 101 is that perfectly efficient markets need perfect information, so it is hard to make the argument that less information would make fixed income markets more efficient. But at the same time, the reality is that block trades are difficult to execute, and that could become more difficult with more transparency.

Bill de Leon, Global Head of Portfolio Risk Management at Pimco, argued that current information-disclosure requirements for corporate bond trading don’t allow enough time for institutions to finesse their big trades without tipping their hand.   

The size of the corporate-bond market has about doubled as regulators have compacted trade-reporting times, while turnover has stayed about the same. “We have seen a deterioration in liquidity,” de Leon said. “Speeding up information hurts the ability of end users to transact because liquidity providers won’t provide liquidity.

What works with the standardization of the equity market may not work in fixed income. “Corporate bonds are not widgets — GE might have 100 bonds, but only one stock,” de Leon said. “An intermediary has to be willing to do that trade, and when information gets out quickly, that’s a problem.”  

Neal Rayner, Head of U.S. Fixed Income Trading at Janus Henderson Investors, said he has a “love/hate” relationship with the Trade Reporting and Compliance Engine (Trace), which was introduced in 2002 and has expanded its sweep since then. “Sometimes it’s fantastic sometimes I wish it didn’t exist,” Rayner said.

Panelists cited the ‘winner’s curse’ phenomenon, in which the largest asset managers are the ones with the largest and biggest-footprint trades.  

Mustafa Chowdhury, Head of Rates at Voya Investment Management, supported that notion. He indicated that Voya embraces transparency, at least partly because as a non-giant institutional manager, its trades are generally smaller and information about its trades is less likely to move markets in the wrong direction.  

“It’s important to know where you are on the spectrum of big versus small,” Chowdhury said. “If you are an information taker, you want more information.”

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