What if fixed income index constituents were accurately priced in real-time?

Fixed income indices generally provide an official valuation once per day. Historically this has been because pricing for the underlying constituents wasn’t available outside of published end-of-day prices. Given the OTC nature and infrequent trading of some bonds, even one-time end-of-day pricing can be challenging. With advances in pricing capabilities and demand from the market, predominantly ETF Market Makers who need to provide real-time liquidity for the ETF shares, some pricing vendors began providing pricing at more frequent intervals during the trading day. However, the challenges around data availability, modeling capabilities and subsequently, accuracy, remain.

Enter MarketAxess and CP+™

Our unique position within the capital markets and electronic credit trading market share of over 70%, give us a broader view of pricing inputs than competitors. Approximately 20% of TRACE-reported US IG volumes and 12% of US HY volumes are executed on our platform. Not only do we have access to the TRACE-reported data for these trades, we see all prices submitted for a given inquiry which provides greater visibility into depth of market leading to more accurate real-time pricing. Additionally, our unique vantage point helps better understand the context and pricing implications for non-standard trade patterns such as dealer-initiated transactions. We have been able to harness all this data with a machine learning algorithm that produces two-sided markets every 15-60 seconds for the vast majority of TRACE volumes. The access to additional data points combined with the innovative approach to modeling bond pricing has allowed MarketAxess to quickly build CP+ into a recognized leader in real time valuation of fixed income securities.

What does this mean for fixed income indexing?

We have already seen the impact of accurate real-time pricing as clients have embraced CP+ as a pricing benchmark in our auto-execution and crossing trading protocols. As we roll out indices that utilize CP+ as the pricing source, the intra-day transparency will provide significantly greater confidence to market participants as to where they can execute while also providing where those constituents will be officially marked at end-of-day. With increased certainty around pricing comes lower execution costs and tighter markets. When accurate real-time prices are combined with investable index construction, fixed income indexing and index products can trade more like equity indices. This means transparent execution and hedging costs, the potential for full index baskets which eliminate basis risk and timely basket negotiations, the potential for real-time indices and greater velocity of trading for credit vehicles. Most market participants recognize the impediments holding back fixed income index trading. We feel that CP+ removes the most significant hurdle and will help usher in a new stage for bond indexing.

For questions or follow-up, get in touch with John at jkeller@marketaxess.com

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This is the second in a series of blogs that dives into the rapidly changing fixed income index market and the issues that will need to be addressed to improve efficiencies in that market. John Keller, ETF Product Manager, utilizes his extensive industry experience to highlight areas of opportunity in Fixed Income indexation. Be on the lookout for the following topics that will be published as part of this “What if” blog series:

• What if, fixed income index constituents traded on live order books with visible depth of markets?
• What if, fixed income ETF baskets could mimic the index with accurate real-time NAVs and premiums and discounts?
• In case you missed it, read the first blog in the series here: What if fixed income indices were comprised of securities that were investable?