Even big name bond advocates like A. Gary Shilling or Robert Arnott would have difficulty arguing that bond market performance over the last 30 or 40 years was likely to repeat itself.
Even so some advisers are increasingly looking at bonds as a safer vehicle thanks to unceasing stock volatility and market turmoil.
So it is that those same advisers should look with an optimistic eye on developments like the announcement by BondDesk Trading LLC Wednesday of a partnership with rival Trade West Systems, itself a division of MarketAxess Technologies Inc.
BondDesk is the Big Dog of retail fixed income trading and execution and advisers that are familiar with the bond market will already be well aware that the BondDesk alternative trading system is the largest out there.
Available to the dealer community now, this new partnership arrangement allows clients to seek liquidity even farther afield.
In a nutshell the new BondDesk aggregation system being powered by Trade West will allow traders to view multiple markets through one portal and thereby better assess market pricing from many different liquidity sources.
Powering this is Trade West's LiquidityBridge Aggregator technology, which provides real-time market pricing and alerting capabilities.
In an interview Chris Shayne, senior market strategist for BondDesk and Jan Mayle, head of product and strategy explained that the firm had always been an aggregator of their own contributing dealers and this is really yet another, albeit larger, extension of that.
“What is different now is bringing together several competing ATSs,” said Mr. Mayle.
“These are available to several different constituents, first among them being the traders, the ones that provide liquidity to the marketplace,” he added.
He explained that BondDesk evaluated eight different potential ATS partner solutions and settled on TradeWest as the best match for their purposes; principally because of the firm's flexibility in terms of installation, whether at their own site or that of BondDesk's facilities.
“We looked at the feature set compared to the other aggregation providers out there as well and they could offer a more retail-focused version of their solution than others, traders are using this to look at the entire market place and sharpen their pencils,” said Mr. Mayle.
Even with the additions, the BondDesk system's algorithm goes through all the ATSs seeking the best execution — meaning it examines all the bonds similar to a particular CUSIP being sought and finds the best cost, among several other characteristics.
That assists the second constituency among BondDesk's clientele; the liaison trader that typically supports advisers and helps them with purchasing fixed income securities.
“When that liaison gets that order they will look to see the adviser got the best deal they could after going through all the liquidity pools out there — ours and others,” said Mr. Mayle.
He added that this leaves just the third constituent that BondDesk is trying to satisfy, the adviser themselves or the retail customer.
“They are the largest challenge when it comes to aggregating multiple ATSs,” he said.
While liquidity, at least in the past, was fragmented among multiple dealers, now with aggregated systems the challenge now becomes making sure that each bond only shows up once in the BondDesk marketplace, aka “phantom liquidity.”
With that in mind BondDesk plans to roll out an additional service in the first quarter of 2012 called BondDesk TrueMarkets Aggregator, an enhanced version of the current aggregator that is meant to make will phantom liquidity a thing of the past by employing a proprietary algorithm that seeks out and removes duplicate liquidity.
Mr. Mayle explained the hazard to me in a hypothetical case of phantom liquidity: “Let's say I own 50 bonds and I want to show those bonds to all the ATSs, let's say five ATSs. The aggregation solution sees five lots of 50 bonds being offered for sale. The offerer tends to be anonymous and the aggregator [in the past anyway] thinks these are all different. The adviser would see 250 bonds — not the actual 50.”
Obviously this can get messy if one extrapolates further the permutation.
Now I will paraphrase: A customer says by 100 for me. The adviser says hmmm, well there are five lots of 50. That's fine the customer says. The adviser goes to buy them though and finds they are all in reality the same 50. That disappoints the customer and they may even want the adviser to unwind those buys.
Not pretty.
So the mission of TrueMarkets is to deliver not only additional liquidity but scrubbed aggregated liquidity markets ready for consumption by both retail investors and their financial advisers.
“While this may seem simple, the algorithm behind the scenes is incredibly complex and we are not aware of anyone else that has been able to solve for this problem in a sophisticated way,” said Mr. Mayle.
