OPINION: Mind the (Bond Info) Gap

Terry Flanagan

Traders aren’t the only ones who want more information about fixed income markets.

The supply-demand imbalance was on full display in Goldman Sach’s earnings conference call last week. On the call, no fewer than a half-dozen analysts peppered Goldman executives on how and why the company’s first-quarter FICC trading revenue was essentially flat, while rivals including BofA, Citi and J.P. Morgan reported sizable gains.

“I’m curious to see how you’d describe exactly what happened,” Glenn Schorr of Evercore said.

“Just back on FICC again here, could you help us size in just dollar terms the issues around commodities and currencies?” Christian Bolu of Credit Suisse asked.

Brennan Hawken of UBS was a bit more direct. “(On) the FICC question, I’m still confused and I think I have some company,” he said.

Lastly, Guy Moszkowski of Autonomous Research acknowledged his was the “umpteenth question on the FICC thing.”

Goldman execs didn’t offer much in the way of specifics to explain the first-quarter underperformance, other than citing low volatility and low client activity. “We didn’t navigate the market well,” soon-to-be CFO Martin Chavez said. “In some market environments, one navigates a better outcome than others,” Chavez reiterated later on the call.
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It’s a surprise anytime Goldman, the whitest-shoe of the white-shoe Wall Street firms, gets its lunch eaten. So the inquisitiveness of the analysts, who want to know what’s going on the FICC business to have a more accurate sense of Goldman’s earnings power and the direction of GS stock, was understandable.

But the quarter can be seen as a reflection of broader opacity in fixed income markets, where electronic trading has made good strides and transparency has improved, but information shortfalls remain.

On the most basic, granular, level, buy-side investors need more information and data about what the sell side is doing, particularly in the credit space. How liquid is a given fixed income security? What is best execution and how do I get it? How severe of a haircut will I get entering or exiting this position?

“Data provided by Algomi suggests that bond dealers are unable or unwilling to provide prices on more than 90% of client inquiries for illiquid bonds,” Greenwich Associates said in a report earlier this year. ”The secret sauce for liquidity intelligence is in allowing the buy side to gain access to data on what the sell side is doing.”

Algomi and other trading platforms and fintech innovators are moving to address this need, but it’s a massive, multi-year effort.

In the meantime, expect more choppiness and the occasional surprise winner or loser in the fixed income space. As Warren Buffet says, only when the tide goes out do you discover who’s been swimming naked.   

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