Bond Traders Find New Way to Get Early View of US Credit Markets
(Bloomberg) — New rules in Europe are bringing US corporate bonds closer to real-time 24-hour trading — and helping American market players get more realistic prices earlier in the day.
That’s because more trades in the UK, including US dollar bond trades that take place in London, now must be reported as soon as possible, and no later than 15 minutes after execution. A similar shift is expected in the European Union in March.
The likely result: More realistic quotes on a bond’s current price and smaller differences between the bid and ask levels that could cut trading costs for some investors, including retail buyers. Better liquidity and less volatility might follow as more participants are attracted to European platforms in the hours before trading shifts to the US.
Europe’s top bond dealers — which includes the biggest banks on Wall Street — might have to contend with tighter spreads and more competition from electronic market makers in their $5 billion-a-day UK corner of the market. But if two decades of US experience is any guide, with volume hitting a new record every year, cheaper trading may also spur more activity.
“This is democratizing market data and putting it out there for everyone to see,” said Marty Mannion, a former senior executive at Citadel who now leads a computer-driven trading team at Toronto-Dominion Bank that’s looking to take advantage of the shift.
The region’s overseers have been trying for years to close the gap with reporting in the US, known as Trace, which started offering faster and more transparent price quotes in 2002. Tighter spreads, more precise pricing and lower costs for investors soon followed, according to a 2022 retrospective by US regulators, who said the change didn’t hurt liquidity and helped “level the playing field for all market participants,” including retail investors.
“Europe is basically 20 years behind the US in terms of bond market transparency,” said Zornitsa Todorova, head of thematic fixed-income research at Barclays Research. “This is the last piece of the puzzle that has been missing.”
The new UK rules kicked in Dec. 1, and impact is already showing in data compiled through Dec. 19 for Barclays by Todorova and Andrea Diaz Lafuente. Out of the $5 billion of US debt traded in the UK daily, around $1 billion was reported in real time. That’s an enormous increase from just $50 million before the transparency shift.
The entire day’s trading isn’t reflected because British regulators defined four different reporting categories — real-time, next-day, two weeks or three months, depending on transaction size and bond characteristics. Trades that are larger or less liquid have longer deferrals to allow dealers time to hedge or unwind their position before the transaction is disclosed and potentially moves the market against dealer, according to Barclays.
Early Look
Still, it’s an efficient way to gauge investor demand for dollar bonds and provide some price discovery ahead of the US session, according to Barclays. The zone between 8 a.m. and 9 a.m. in New York is especially gray, Todorova said.
Granted, the earlier reporting out of London “may make the New York open look optically cleaner,” said Grant Nachman, chief investment officer of credit firm Shorecliff Asset Management. “The trade-off is that dealers may show less size to avoid getting caught offsides, which may translate into reduced market depth when investors actually need liquidity.”
There’s some support for that view in the initial Barclays data. Looking at transactions executed on UK venues in the least‑liquid bonds (and below £500 million for European high-yield bonds), trades under £500,000 accounted for two‑thirds of activity. Back in November, Barclays found they comprised just 60%.
Cost savings also may not be shared evenly. Last year, the bank calculated that increased real‑time transparency would cut transaction costs by about 7% for trades of less than €500,000, with no material change for transactions between €500,000 and €1 million. For bigger trades, though, costs could increase 10% to 15%.
Wealth Transfer
Researchers at the Massachusetts Institute of Technology and University of Chicago found in 2019 that more up-to-date information had upended bargaining positions, “allowing investors to benefit at the expense of dealers. Our best estimate is that Trace transferred about $600 million a year from dealers to customers.”
“Greater transparency is likely negative for dealers,” who might cut down on risk-taking, Nachman said. “For investors, probably mixed: anticipate tighter bid-ask spreads on smaller trades, but potentially more difficulty moving large size if dealers pull back.”
Sam Berberian, global head of credit trading at Citadel Securities, expects transaction costs over time to likely decline as a result of better liquidity and better transparency, which would be a clear benefit for investors. A much deeper liquidity environment should also benefit issuers through potentially reducing new issue concessions.
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