What if fixed income index constituents traded on live order books with visible depth of market?

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I’m frequently reminded about the lessons fixed income credit market can learn from equities. Our President and COO, Chris Concannon, has an equity market background and is very open about the topic. One difference between the two markets that he is known to highlight is the contrast between the prevalent trading protocols. In equities, participants generally post levels at which they wish to trade (aggressors provide liquidity). In fixed income, the participants generally request levels where the market will trade (aggressors take liquidity). It’s a subtle but significant difference and it reinforces the dichotomy in liquidity profiles of the two markets. There are a number of reasons why the credit market hasn’t offered a protocol whereby institutional investors can efficiently express their intentions in this way (not enough data, too many cusips, etc). MarketAxess believes the credit market is poised to overcome these hurdles, adopt an equity-like trading protocol and bring about greater price transparency.

Enter MarketAxess and Live Markets

Live Markets is the first order book, click-to-trade protocol for institutional credit markets. Dealers, ETF market makers and the buy side can now anonymously stream or enter one or two-sided markets into an order book that is fully visible to our extensive client base. This creates unique trading opportunities but also significant amounts of pricing content.

What does this mean for fixed income indexing?

As we laid out in the earlier blogs, fixed income indexing has always struggled with timely and accurate pricing of the underlying constituents. Levels posted in Live Markets are fully executable with the ability to “sweep the stack”. This means that if all of an investable index’s constituents are populated on Live Markets, an index trader (ETF, TRS or basket) that is coded to our APIs will have the ability to instantaneously value index trades of various sizes. Imagine a client asks a dealer to quote $100 and $200 million of an index. The dealer will have visibility down the stack to size and price the hedge of both sizes. Imagine an ETF market maker being able to automate the execution of a basket much the way they do in equity ETFs today. Imagine an ETF Issuer being able to display the liquidity of the basket underlying a new small ETF as opposed to the liquidity of the ETF shares themselves (which traditionally would be narrow for a new, small ETF). Live Markets will help to evolve the fixed income indexing space by addressing these issues in the market.

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

This is the third in our 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. The final topic of this series will be available soon:

  • 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: