Interdealer broker Icap is launching a bond-trading platform in Europe that will enable broker-dealers to find matches for trading so-called odd lots. Called Scrapbook, the platform will employ Interactive Data's Continuous Fixed Income Evaluated Prices to enhance price discovery and facilitate trade idea generation.
"As a bigger percentage of the fixed income markets move to electronic trading platforms, there's a need to have a more current price available at all time as the market continues to struggle with liquidity," Bill Gartland, senior director of evaluated pricing services at Interactive Data, told Markets Media.
Of the almost 6,000 individual corporate bonds that trade on a given day, only about 10%, will trade more than 10 times. "With the ones that trade all the time, everybody's pretty certain about what the valuations are," Gartland said. "Once you get away from that, pricing becomes more of an issue."
When the Scrapbook service, which will be operated by Icap's BrokerTec MTF (Multilateral Trading Facility) under the regulated entity of BrokerTec Europe Ltd., was brought to IDC's attention, it concluded that it would make a good use case for evaluated pricing.
Since originally announcing the expansion of its fixed income pricing services to include continuous evaluations in 2013, IDC has enhanced the technology, pricing processes, models and workflows needed to support continuous evaluated pricing across multiple fixed income asset classes.
"It turned out that Icap was looking for a source to help provide the pricing into that product so that they could have an independent price at which to conduct the auctions that the Scrapbook product was intended to facilitate between the participants on the platform," said Gartland. "We were able to win the business to be the provider of the pricing that is being used to fuel the trading through that platform."
The idea behind Scrapbook is to provide a way for broker-dealers to clean up a lot of the small sized, mid-sized lots, or 'scraps', they end up with. "The corporate bond market has experienced reduced liquidity from a combination of increased regulatory controls and challenging market conditions.," Dean Berry, head of e-Commerce at Icap, said in a release. "We believe that Scrapbook meets the changing needs of bond traders, offering an intuitive new solution that combines anonymity with leading technology, pricing and a regulated trade environment."
Clients will submit the bonds that they want to be able to trade in an auction, and Icap will put those instruments on their platform with the continuous evaluated pricing provided by Interactive Data.
"You end up buying from one broker and selling to another and sometimes there's a bit left over and they want to try to move those off their books," Gartland said. "Brokers can submit to Icap a set of ISINs [International Securities Identification Numbers] that they'd like to have listed in the Scrapbook auction."
Initially, Icap will hold auctions once or twice a week, but intends to expand the number of auctions, according to Gartland. "My understanding is that dealers participate by submitting a willingness to buy or sell a certain size of the position at the price posted by Icap," Gartland said. "In this way, the dealers can clean up scraps, which is why they came up with the name Scrapbook. They clean up the little tag ends of positions they end up holding on the books and then free up capital so they can use it more efficiently for larger trades."
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