The UK financial watchdog has found the amount of failed or rejected trades in fixed income markets has increased, an issue raised by buy-siders in the past.
Despite claiming to have ‘little evidence’ in the past of a quantifiable deterioration of liquidity in bond markets, the Financial Conduct Authority (FCA) has now suggested there has been a ‘moderate decline’.
In a recent study on liquidity in UK corporate bond markets, the FCA highlighted “an increase in the amount of failed or rejected trades, an increase in the amount of time it takes to fill an order, a decline in dealer quote rates on electronic bond trading platforms, and a slight widening of some quoted and effective bid-ask spreads.”
The report, which included new data on quotes and orders, also found liquidity for transaction-based proxies from mid-2014 onwards has declined.
Asset managers have raised the issue of rejected bond trades in the past year, as fixed income traders gear up for substantial pre-trade transparency changes ahead of MiFID II.
In May last year, The TRADE learned representatives of the FCA were shown data on the percentage of bond trade rejections against prices advertised on Bloomberg.
Chris Bowie, partner at TwentyFour Asset Management, explained how his firm invited the FCA to see how trading fixed income is significantly different to trading in equities.
He said: “We invited the FCA to show them what, in their view, is the most liquid market. They saw the offer prices on screen, but all banks rejected the trades.
“There was a look of horror on the regulators’ face. In their view, the screen price is a real price so there must be liquidity, but that simply isn’t the case.”
Bowie added: “Regulators seem reluctant to change, but they want to look at Bloomberg’s data on rejected offers in fixed income.”
A study authored by the International Capital Markets Association (ICMA) in July last year, found half of buy-side firms agree bond liquidity has deteriorated.
Yet regulators worldwide remain adamant that this is not the case. In October, the Federal Reserve Bank of New York authored a report and argued there was ‘no strong evidence of deterioration’ in bond market liquidity since the financial crisis.
The report found evidence from measures of depth and price impact of reduced liquidity, but this was “within historical variations and far from crisis levels.”
Similarly, the FCA stated in March last year it found “little evidence of a quantifiable deterioration of liquidity for the period 2008-2014.”