Officials from the securities markets division of the European Commission (EC) have been talking once again about draft proposals for a consolidated tape to bring more transparency to strategic asset classes, including equities, derivatives, exchange-traded funds (ETFs) and bonds.
There’s a chance this will come to pass for the first three, which are mostly exchange traded, albeit across many venues.
However, it still looks a stretch too far for the largely over-the-counter (OTC) markets in sovereign bonds and especially in corporate bonds, which are bedevilled by large numbers of different securities that rarely trade, even though ETF technology has partially solved some of the chronic illiquidity.
Mifid II regulations have imposed a degree of post-trade transparency, with the big request-for-quote trading platforms, such as Tradeweb, Bloomberg and MarketAxess, each reporting trades through an approved publication arrangement (APA), albeit sometimes after lengthy delays for large deals.
I would love to see a consolidated tape for corporate bonds, but that is not possible in the current market structure
Vuk Magdelinic, Overbond
Dealers and asset managers negotiated these waivers in the run up to Mifid II by stressing the downside of real-time transparency, namely that investors seeking to buy or sell bonds in size could suffer substantial and harmful price impact if the first step in such a portfolio repositioning became obvious.
Bond markets remain opaque and fractured, even while small-ticket trades are increasingly automated. The very reasons why so many participants want a consolidated tape – to gain a view on price and volume across venues, allow confidence in placing trades and to assist with best execution – make it hard to achieve one.
Vuk Magdelinic, chief executive of Overbond, says: “I want and would love to see a consolidated tape for corporate bonds implemented tomorrow, but that is not possible in the current market structure.
“European fixed income markets are far more fragmented than the US or Japan, for example, with post-trade data fragmented across the different APAs with inconsistent presentation formats and differing modes of machine readability.”
Linked to this, insufficient data quality is a further challenge.
The EC has suggested it will draft a proposal for a consolidated tape in the coming months and hopes to have a beta version operational in 2023. This will require cooperation from trading venues to somehow link up or share data from their various APAs.
Another way
There may be another way, though. Artificial intelligence (AI) and machine learning make it easier for aggregators to quantify at high speed data from multiple trading venues. Katana does this to identify trading alpha for buy-side and sell-side clients in non-obvious bond market pairs that may show identifiable, even if little understood, correlations.
MarketAxess provides a pre-trade estimate for the likely price at which trades might clear the market through its Composite+ pricing algorithm for corporate bonds. And Overbond, a developer of AI-driven data and analytics and trade automation solutions for the fixed income markets, does much the same.
Magdelinic says: “There is still the problem of highly illiquid bonds that trade a couple of times a month or even a year, but the speed of innovation in analytical tools is chipping away at this as an issue to the point where yield curves for illiquid bonds can be constructed with increasingly accurate prediction.”
Regulators will rightly keep their eyes on the objective of a consolidated tape, but this could be 10 to 15 years away for bonds. Until then, the rest of the market should be pursuing alternative solutions that meet the same ends.
