Corporate bond world to get first daily auction

MarketAxess CEO Chris Concannon. — Bloomberg

NEW YORK: MarketAxess Holdings Inc is seeking to bring a feature of fast-twitch equity markets to the relatively sedate US$9 trillion universe of corporate bonds: the daily closing auction.

The electronic trading company plans to launch a daily “closing print” for corporate bonds – the first standardised end-of-day price in a market long defined by opaque, ad hoc quotes.

The goal is to deepen liquidity and lower trading costs, but the worry is there’s a tradeoff if it squeezes dealer profits tied to the very inefficiencies it would eliminate.

“There are lots of matching sessions in the fixed-income market today,” Chris Concannon, the firm’s chief executive officer, said in an interview.

“There’s no tradeable true auctions. This is the first.”

The closing-auction process – supported by industry titans including BlackRock Inc, State Street Investment Management, AllianceBernstein Holding LP and DWS Group – will match buy and sell interests from dealers and investors to find a single closing price of a bond, according to Concannon.

The auction system will be available to clients and dealers in the coming weeks and will initially be available to a select list of highly liquid bonds, including those within major exchange-traded funds and recently issued bonds, he added.

MarketAxess also plans to roll out an opening auction.

The change to the trading process comes amid rapid structural shifts in the bond market, as traders embrace portfolio trading, fixed-income exchange-traded funds and adopt electronic, high-speed strategies – innovations familiar to equity markets.

In stocks, major exchanges like the New York Stock Exchange use a daily closing auction to consolidate liquidity and determine an official end-of-day price, providing a reference point for indexes, funds and derivatives.

Credit markets, by contrast, have long operated through fragmented and bilateral negotiations with little visibility into where bonds actually trade.

The new closing protocol seeks to change that.

More price transparency widens the scope of data available for systematic investors – who make fast decisions about corporate bonds to buy and sell using complicated algorithms – and expands their opportunity set, according to Andrew Dassori, chief investment officer at Wavelength Capital Management LLC.

“Growing liquidity at market close helps make these trades executable,” said Dassori.

The closing price will, over time, become a reference point for companies looking to sell bonds in the primary market, much like how new issues work in other markets, Concannon said.

While dealers long accustomed to the profits eked out from the inefficiencies brought about by traditional voice trading and request-for-quote processes may take an initial hit, Concannon views auctions as a new way to provide and profit from liquidity by offsetting multiple clients’ supply and demand imbalances.

The auction format will allow dealers to also act as principals while capitalising on price discrepancies that emerge during concentrated trading windows, he added. — Bloomberg