Beyond Post-Trade Transparency in Corporate Bond and Credit Markets

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1 March 2012
Cubillas Ding and Medy Agami

What If Real Time Pre-Trade Price Discovery Became a Reality?


Driven by the need for greater pre-trade transparency, market participants, especially on the buy side, state that pre-trade transparency technologies can help traders get smarter about the correlation between different information and the bonds they are trading. More importantly, they would help firms to generate alpha and gain competitive advantage.

In a new report, Beyond Post-Trade Transparency in Corporate Bond and Credit Markets, Celent examines a new technology by Benchmark Solutions, in which a price discovery engine generates prices for every TRACE-eligible bond every 10 seconds, bringing the US corporate bond market into a new era of pre-trade transparency. In a world of abundant and rapid communications, where price transparency and electronic exchanges exist for almost every other capital market asset class, it is disquieting that no such comprehensive source of reference prices exists for a market as important as US corporate bonds.

“From our perspective, this innovation by Benchmark Solutions has brought today's US corporate bond market to a pre-trade transparency era. The main analogy that went into building this platform was how to make the system generate the closest possible pricing to what is possible for human traders,” says Medy Agami, Analyst at Celent and coauthor of the report. “The Market Calibrated Framework's model is a continuously self-learning and dynamic system with complex event processing capabilities which could find applications in many avenues.”

Celent anticipates technologies such as what Benchmark Solutions is providing to spur growth and enhance secondary trading liquidity in the markets to which it is applied. Depending on how the technology is positioned, buy side firms could further reduce reliance on sell side-centric prices/quotes. Beyond corporate bond and credit markets, this new technology can be applied to other fixed income markets (such as municipal bonds), as well as OTC derivatives.

“Despite TRACE bringing post-trade transparency to the market, it is worth bearing in mind that not all transparency is equal. There is a colossal difference between the impact of pre-trade and post-trade transparency on liquidity in markets such as corporate bonds and credit,” adds Cubillas Ding, Research Director at Celent and coauthor of the report. “First movers could utilize these innovative pre-trade pricing technologies to identify arbitrage and untapped trends to exploit market inefficiencies and gain profit.”

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Capital Markets, Wealth Management
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Capital Markets, Risk, >>Financial Services Risk
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