MarketAxess, the bond-trading platform, has introduced an index which measures liquidity in the bond market in Europe after launching in the US last year.
The Bid-Ask Spread Index (BASI) was introduced last June year to track the difference in spreads between buy and sell trades of the most actively traded US corporate bonds.
Alex Sedgwick, head of research at MarketAxess, told Markets Media that the index was launched in response to the decrease in liquidity since the financial crisis in 2008.
The US Securities and Exchange Commission warned in a report last month that primary dealer capacity in the US is at similar levels to 2001, but assets in bond mutual funds and exchange-traded funds have grown by a factor of four since that time.
The SEC said: “Primary dealer inventories of corporate bonds appear to be at an all-time low, relative to the market size, with holdings of approximately $50bn (0.5% of market size) compared to a peak of approximately $250bn (4% of market size) before the financial crisis. A significant reduction in dealer market-making capacity has the potential to decrease liquidity and increase volatility in the fixed income markets.”
The US index uses bond trade data sent regulator Finra in addition to MarketAxess trade data. However Europe does not have a consolidated tape so the European index uses data from Xtrakter, a capital markets data provider acquired by MarketAxess last year.
Last year Xtrakter processed 1.12 billion transactions on behalf of its users and published pricing data on over 69,000 bonds. It processes approximately 65% of fixed income transactions reported to the Financial Conduct Authority, the UK regulator, according to MarketAxess.
Sedgwick said MarketAxess makes the US index publicly available but he personally speaks to between 16 and 20 US clients who are using the BASI.
“Traders who spend their day actively trading use the index to quantify to their managers and end clients how liquidity has changed,” Sedgwick added. “It can also used to see how it correlates with internal estimates of trading costs.”
The European index includes data from euro- and sterling-denominated high-grade and high yield corporate bonds and can be calculated on a daily, weekly, monthly or quarterly basis.
MarketAxess found that the Euro high-grade BASI is tighter than the Euro high-yield BASI indicating that – as expected – trading costs in the high-yield market are higher than the high-grade market. In addition the euro BASI is much tighter than the sterling BASI, reflecting a larger market and higher better liquidity in Eurobonds.
Sedgwick said MarketAxess was looking into similar data-driven indexes for other geographies and asset classes. “We want to provide indexes that provide a view into opaque markets. However we need to make sure we have a robust number of observations for any end product,” he added.
