Corporate Bonds: The Price Is Right

The landscape for trading corporate bonds is changing rapidly. Whereas investors once received most of their pre-trade price discovery from an avalanche of dealer quotes, changes to business models are leading to a reduction in immediacy and eroding of the value of the quoted market.

Quotes that once represented levels where risk would trade have morphed into levels where risk may trade. Increasingly, the corporate bond market is gravitating toward an order-driven market. While this is a significant move away from traditional order-driven agented markets, the use of riskless principal-based trading is expanding.

The new paradigm requires investors to be increasingly illuminated with respect to the value of their assets and where risk will clear the market. The status quo of unreliable quotes combined with the backward-looking nature of FINRA’s TRACE no longer will suffice if asset managers want to accurately assess transaction cost analysis and prove best execution.

As a result, data providers are raising the bar, rolling out intra-day and real-time continuously evaluated pricing models. Firms including Interactive Data, Markit,Bloomberg and others are at the vanguard of providing more consolidated and continuous pricing data in the relatively illiquid corporate bond markets, potentially guiding investors out of the darkness and toward the light of pre-trade transparency.