Mostly… fixed income and cross product eTrading

September 28, 2006

Certainty of execution

Filed under: etrading — holky @ 3:08 pm

What customer would be happy to go to a nice snazzy shop, to check the marked pricing while getting the goods off the shelf, only to get to the till –

A. to find there is nobody available to sell you those particular goods.

B. to be told no thanks.  The shopowner/till assistant has rejected your offer to buy that particular thing.  To you this isnt for sale.

C. to be told that the price of those goods (to you) is not as marked.  Maybe you’ll be offered the goods at a different (worse) price, or maybe your offer will be rejected (see B.)

Actually lets make this worse.  Lets assume that the shop is actually some form of shopping club.  So you have to be preapproved and have an account setup at the shop before you can actually get in the door to browse the shelves.  So if you were the customer, with your preapproved account setup, wouldn’t you want to know that if you took the trouble to actually go to that shop, you’d be able to buy the goods that were offered to you, at the price shown?  (Also how long would you bother to shop there if they behaved as above?)

Well, this is how it works for price orders in the electronic fixed income space. Here an enabled customer can see the dealer’s pricing and sizes. They can click on the price and send the dealer their price order (“I’d like to buy/sell N of that instrument at your price X“), but the dealer can then just treat the incoming order as an option to trade and so:  ignore the order (A. above),  reject it outright (B.),  or counter the order (C.).  Or of course they can accept it.

Generally customers should now expect to get a better certainty of execution by sending inquiry (/RFQ) instead of a price order – as sellside (surely all sellside??) have automation engines able to receive and price the inquiry based on their relationship with the customer (yes, tiering). And with this automation, there should be little “embarrassment” for customer in sending through inquiry for very small sizes;  with this automation nobody has to manually price each inquiry. Lets take a peek at the FX world – where you see a price (rate) with size in an etrading venue/stream and you can be fairly sure that it’s a genuinely executable price. Why shouldn’t fixed income be like this? OK, the universe of fixed income instruments is much broader than fx currency pairs; so lets just work on the liquid instruments first.

 So question to market-makers, why can’t you accurately and consistently price your (say) top 100 issues/issuers in order to offer your customers an absolutely genuinely executable price feed? If you quote the price with size in the feed, why is it not out there to be executed???  Seriously. If there are technical problems with the pricing engine for those 100 issues, then you really do have some pretty serious tech problems. Perhaps it’s time to ditch the concept of existing price orders in the fixed income world and the history that goes with this type of order.

If as a customer you need the pricing option of streaming pricing then take the quoting concept from other product areas, perhaps in particular the Request for Stream from FX or getting a market quote in equity space (so customer says I’m looking to trade this baby so please stream me bid+ask price for the next ~ 60 seconds) and the dealer does this [tiered by the automation engine!] specifically for the trade they’ve indicated interest in. The sellside can automate their pricing, the customer gets a certainty of execution for click-and-trade on a price stream as it’s genuinely executable, and even the regulators should be happy that the bid/ask spread is clearly known/disclosed pre-trade.



  1. The “failure” of price orders reflects the “failure” of credit electronically.

    Where as I would be wary of comparing e-FX (certainly more advanced relative to its market than FI – but a simpler market as you point out), I agree that for the most liquid issues traders should be prepared to show their good clients a streaming two-way price up to a certain size. If that reflects their axe either way and or you have a wide spread, so be it. Clients are not expecting the banks to take a hit for them, they just want to be sure of execution. This is all about building partnerships with key clients, where their is as much mutual trust as possible in financial markets.

    I’m still a little sceptical about the future success of institutional credit on electronic platforms. As large takeover deals are increasingly being funded by less visible means than bond issuance…..liquidity isn’t going to improve….and nor is the willingness of credit traders to be as transparent as their government counterparts.

    Comment by waratah — October 2, 2006 @ 8:29 am

  2. sorry, my spelling is dreadful! : )

    Comment by waratah — October 2, 2006 @ 2:24 pm

  3. i think price streaming is not yet fully understood
    especially when all prices are combined
    i think LH may be hurting themseleves in the long run

    Comment by oldtimer — May 16, 2007 @ 2:50 pm

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