Bridging information gaps in the bond market

Published on 3 May 2019

Gaps in information between counterparties and clients can challenge buy-side bond traders, impacting the investment process. Frank Cerveny, head of markets and sales at MTS, explains how data can be managed effectively in order to bridge those gaps, improving trade execution quality.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bonds investors. I’m Dan Barnes. The infrequency with which many bonds trade makes the ability to react to market changes a challenge for investors, and makes quality data key in seizing investment opportunities and delivering better execution. To discuss how investment funds can get the data they need to be responsive, we’re speaking with Frank Cerveny, head of marketing and sales at MTS. Frank, welcome back to Trader TV.

Frank Cerveny Thank you, Dan. It’s great to be here.

Dan Barnes So where do traders find information gaps in the data they have today?

Frank Cerveny There are two principal gaps that traders are concerned with; the gap between the information they have and that of their competitors, but also any information asymmetry that exists between their book and that of their clients. And as markets become faster and more efficient, any differential in these gaps becomes more pronounced over time. That is the reason why at MTS, we’ve put a lot of effort into expanding our data offering, not only for cash bonds and repo, but also for the corporate and EM bond markets as well.

Dan Barnes What effect do those gaps in firms’ ability to trade?

Frank Cerveny Any time there is information asymmetry, it creates winners and losers. At the heart of this information asymmetry is really two principal issues; speed and quality. Now, before we even go on to address the speed issue, I think it’s very important to address the quality issue. Whether you be a model builder, trader, an academic, a regulator or even a policy maker, having accurate data is critical. I remember an example in 2007, 2008, when all of a sudden the screen started to disappear and there was a big argument on my desk between my traders and senior management, over where the right place was to mark the book. Now there is always a theoretical price to every trade, and there’s a price where you can actually sell it in the market. Relying on the theoretical price can be very dangerous. And in this example, we were rewarded for marking the books down early or getting out.

Dan Barnes So what are the lessons we can take from that?

Frank Cerveny Always get the best data you can find, and always rely where possible on live, executable pricing, instead of any derived or matrix-based pricing.

Dan Barnes How will that data fit into trader’s workflows?

Frank Cerveny That’s a great question, but it’s also very dependent upon the role that you play. Whether you are building models, analyzing historic trends and market moving events, trying to set policy, whether it be pre-trade, at-trade, or post-trade, the data and input you have is critical. Increasingly, we’re seeing individuals use data in different ways. Fx we’re increasingly seeing cash traders ask for repo data even if they’re not trying to trade in the repo markets, they want to know what is the cost of funding and running a position before they choose to enter into it. And similarly speaking, as we move towards greater auto-execution, having access to live data is critical.

Dan Barnes So how do you see data being supplied more effectively?

Frank Cerveny At MTS we already use a number of ways to to deliver data, whether it be an API, end of day, flat file, or through normal data vendors or even co-location. We are looking for ways to simplify the transmission of data and we’re always looking for improvements. Since the advent of MiFID, the demands and the amount of data we’re being asked to handle has increased dramatically. This will only increase further with the advent of SFDR and we are trying to find more ways to process this data and deliver it in an efficient manner. We’re also mindful of the resources at hand. So,  fx a lot of buy-side lack the data scientist that are found on the sell-side. So for the buy-side, we have tried to integrate data, not only into our GUI, but allow them to take advantage of new protocols such as accept-best and auto-execution to help limit any impact from fast moving markets, or changing data may have.

Dan Barnes We hear about active fund managers becoming more structured in their approach to investment management, does that mean they’re consuming data in a different way?

Frank Cerveny I think first and foremost they have to now. The advent of MiFID has basically changed the rules where now it’s the responsibility of the buy-side to prove best execution. Now this is a very big ask, because all of a sudden the number of fields and the amount of information they are tracking, makes it very, very difficult. At MTS we’ve made great efforts to kind of redesign our GUI and a way to make this easier for the buy-side, and we do that first and foremost at pre-trade by supplying data and an easy to read, easy to view format. So before you decide on what to trade, you understand how receptive the market is for what you want to trade, at the time of trade. And then in terms of post-trade, when you’re analyzing your trades and trying to prove best execution.

Dan Barnes Frank, that’s been brilliant. Thank you.

Frank Cerveny Thank you, Dan.

Dan Barnes I’d like to thank Frank Cerveny at MTS, and of course you for watching. To catch our monthly reports on other markets, or to subscribe to our newsletter, go to TraderTV.NET.