Tag Archives: corporate bond liquidity

bond etf liquidity

Calling for Clarity: Corporate Bond ETF Liquidity

There continues to be a call for clarity with regard to the topic of corporate bond ETF liquidity and where/how corporate bond ETFs add or detract within the context of investors ability to get ‘best execution’ when secondary market trade in underlying corporate bonds is increasingly ‘illiquid.’

This not only a big agenda item for the SEC to wrap their arms around, it is a challenge for “market experts” to frame in a manner that resonates with even the most knowledgeable bond market players.

MarketsMuse curators noticed that ETF market guru Dave Nadig penned a piece for ETF.com last night “How Illiquid are Bond ETFs, Really?” that helps to distill the discussion elements in a manner that even regulators can understand.. Without  further ado, below is the opening extract..

“Transcendent liquidity” is a somewhat silly-sounding phrase coined by the equally silly Matt Hougan, CEO of ETF.com, to discuss the odd situation in fixed-income ETFs—specifically, fixed-income ETFs tracking narrow corners of the market like high-yield bonds.

But it’s increasingly the focus of regulators and skeptical investors like Carl Icahn. Simply put: Flagship funds like the iShares iBoxx High Yield Corporate Bond ETF (HYG | B-68) trade like water, while their underlying holdings don’t. Is this a real problem, or a unicorn?

Defining Liquidity

The problem with even analyzing this question starts with definitions. When most people talk about ETF liquidity, they’re actually conflating two different things: tradability and fairness.

Tradability is actually a pretty simple concept: How well will the market let me get in or out of an ETF? And for narrow fixed-income ETFs (I’m limiting myself to corporates, in this analysis), most investors should be paying attention to the fairly obvious metrics, e.g., things like median daily dollar volume and time-weighted average spreads. By these metrics, a fund like HYG looks like the easiest thing to trade ever:

On a value basis, the average spread for HYG on a bad day of the past year is under 2 basis points. It’s consistently a penny wide on a handle around $80, with nearly $1 billion changing hands on most days. That puts it among the most liquid securities in the world. And that easy liquidity is precisely what has the SEC—and some investors—concerned.

Fairness

But that’s tradability, not fairness. Fairness is a unique concept to ETF trading. We don’t talk about whether the execution you got in Apple was “fair.” You might get a poor execution, or you might sell on a dip, but there’s no question that your properly settled trade in Apple is “fair.”

In an ETF, however, there is an inherent “fair” price—the net asset value of the ETF at the time you trade it—intraday NAV or iNAV. If the ETF only holds Apple and Microsoft, that fair price is easy to calculate, and is in fact disseminated every 15 seconds by the exchange.

But when the underlying securities are illiquid for some reason (hard to value, time-zone disconnects or just obscure), assessing the “fair” price becomes difficult, if not impossible.

If the securities in the ETF are all listed in Tokyo, then your execution at noon in New York will necessarily not be exactly the NAV of the ETF, because none of those holdings is currently trading.

Premiums & Discounts

In the case of something like corporate bonds, the issue isn’t one of time zone, it’s one of market structure. Corporate bonds are an over-the-counter, dealer-based market. That means the iNAV of a fund like HYG is based not on the last trade for each bond it holds (which could literally be days old), but on a pricing services estimate of how much each bond is worth. That leads to the appearance of premiums or discounts that swing to +/- 1%.

To read the full article, please click here

LiquidNet: Make Corporate Bond Trading More Liquid [For Buyside Only]

Many fixed income folks are lamenting about liquidity in the corporate bond market. LiquidNet, the institutional trading platform is determined to make corporate bond trading more liquid..for the buyside.

Just when you thought e-bond trading for corporate bonds was a never ending pipe dream…

Liquidnet Launches Fixed Income Dark Pool to Centralize Institutional Trading of Corporate Bonds

More than 120 asset managers across the US and Europe on-board for launch

Enrolled asset managers comprise two-thirds of top 50 holders of US corporate bond assets under management

September 29, 2015 08:00 AM Eastern Daylight Time

NEW YORK–(BUSINESS WIRE)–Liquidnet, the global institutional trading network, today announced the launch of their Fixed Income dark pool that facilitates direct, peer-to-peer trading of corporate bonds among asset managers in the US, Canada and Europe, creating a much-needed hub of institutional liquidity. Liquidnet has enrolled more than 120 asset managers, representing a critical mass of liquidity and a sizeable portion of assets under management for high yield and investment grade bonds in the US. At launch, the platform will enable trading for US and European corporate bonds (high yield and investment grade), emerging market corporate bonds, and European convertible bonds.

“Greenwich Associates research found that 80% of investors find it extremely difficult to execute large block trades; as such, a platform that can help ease that burden while not causing a shift in the trader’s workflow is a necessary part of the path forward.”

The Fixed Income dark pool has been designed to provide a seamless solution for corporate bond traders, providing them a protected venue in which to trade natural liquidity safely and efficiently. The platform has been built with input from Liquidnet’s network of leading asset managers and bolstered by the firm’s experience operating the leading dark pool for the institutional trading of equities. Similar to Liquidnet’s equities solution, the Fixed Income dark pool will provide the option for those corporate bond traders utilizing an order management system (OMS) to easily have their orders swept into the pool with minimal changes to existing workflow.

“The fixed income market has been woefully underserved by technology and, as concerns about a liquidity crunch continue to rise, it needs a transformation,” said Seth Merrin, founder and CEO of Liquidnet. “With close to 15 years of experience connecting asset managers around the world to solve the unique challenges of institutional equities trading, Liquidnet is uniquely positioned to provide a more efficient trading solution and experience that delivers a critical mass of natural liquidity that minimizes information leakage and maximizes best execution.”

Liquidnet has leveraged its relationships with partners and existing buy-side Member firms to ensure the platform’s success at launch. In June, the firm announced successful integrations with seven OMS operators that support direct connectivity, and a partnership with Interactive Data for continuous evaluated pricing to aid in pre-trade transparency and more efficient best execution analysis. In addition to new features, Liquidnet has also expanded its Fixed Income team and expertise with the recent high-profile appointment of Chris Dennis, formerly of BlackRock, as head of US Fixed Income Sales.

“The corporate bond market is desperate for innovation and improved efficiencies, and we’re starting to see several new trading platforms emerge,” said Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates. “Greenwich Associates research found that 80% of investors find it extremely difficult to execute large block trades; as such, a platform that can help ease that burden while not causing a shift in the trader’s workflow is a necessary part of the path forward.”

“Liquidnet Fixed Income was designed with significant input from the buy side to create the first true dark pool for corporate bonds,” said Constantinos Antoniades, Liquidnet’s Head of Fixed Income. “By facilitating a high-quality critical mass of participants, including two-thirds of the top 50 holders of US corporate bonds, Liquidnet will provide the most convenient, secure trading venue for institutional fixed income trading going forward.”

A recent survey of buy-side firms—comprising $12.15 trillion in assets under management—conducted by fixed income magazine, The Desk, stated that 58 percent of buy-side respondents indicated that they were planning to move to Liquidnet for their fixed income trading.1

Corporate Bond ETFs and Liquidity: A Looming Black Swan or Extended Contango?

MarketsMuse update inspired by yesterday’s column by Tom Lydon/ETFtrends.com and smacks at the heart of what certain “bomb throwers” believe could be a Black Swan event, albeit an event that may not be driven by a global crisis or surprise economic event. The event in question will, in theory, take place when interest rates start ticking up (and underlying corporate bond prices tick down) and institutional bond fund managers find themselves trying to figure out whether to simply suffer from mark-downs (and performance) or to continue collecting coupons until the issues they hold mature.

MM Editor Note: Since most folks know that bond managers are akin to lemmings (no disrespect intended!) and typically follow each other like blind mice, given the massive size of the corporate market place, a potential avalanche could take place when everyone runs for the exit if rates tick up and simultaneously, the economy starts to slow. Wall Street dealers are certainly not going to be available to catch those falling knives, simply because new regulations have put a crimp in the capital they can commit to warehousing positions. Worse still, its easy to envision one very long contango event, where the cash ETF trades at a discount to the value of the underlying bonds, simply because one won’t be able to sell those underlying bonds in any type of material size.

Here’s an opening extract from Tom Lydon’s piece “Liquidity Concerns In Corporate Bond ETFs”: Continue reading