Trading In The Primary Markets

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By Laurent Albert, Global Head of Trading, Natixis Asset Management

What are the most interesting recent trading practice developments in the fixed income primary market?
By way of an example of how things are moving forward, I’d highlight an industry collaborative initiative. Eleven major international banks are sponsoring a new application that will provide comprehensive details about new European primary market deals on a dedicated, centralised website. It will include information on price guidance, the size of the issue and the book and the likely timing of the launch. The intention is to publish the details of around 80% of new European fixed income issues, giving access to both sell-side and buy-side market participants, and is planned to go live by the end of this year.

Although the service does not aim to offer real-time data, it has attracted a lot of interest within the industry because it is important for several reasons.

First, it sets a precedent for the sharing of sensitive information among market participants. Second, it will provide greater transparency beyond the immediate stakeholders. And third, it should facilitate more robust database construction.

The initiative is especially significant now, because at a time when euro-denominated bond issuance volumes have soared, there has been a decline in the fluidity of the book-building process and the visibility of book sizes.

What reforms would you propose to help improve the functioning of the primary market?
There should be a closer correlation between the issue size posted in the book and the actual size that the issuer wants. This requires a greater level of control than at present, which often has a negative impact on the final yield spread and therefore penalises investors.

Are there other deficiencies in the market that need to be remedied?
Poor liquidity in the secondary market is a major challenge. More and more banks are widening their bid-offer spreads, so the growth of a vibrant repo market would be a great help.

The high yield market in particular suffers from both a lack of liquidity and transparency. There is almost zero visibility during the book-building phases of new issues, and the buy-side is unable to benchmark their ultimate allocation against an average allocation.

How can the primary market issue managers help improve secondary market trading?
Banks must be fully involved and engaged in the secondary market, by providing liquidity and competitive prices, especially if they are awarded lead manager mandates for primary market deals.

Who is best qualified to resolve these problems, the regulators of market participants themselves?
The over-arching regulation underway will actually lead to a reassessment of the regulatory approach and perhaps even a reduction in the focus on topdown prescriptions. The industry and its commercial participants must resolve the key issues themselves, and enhance market efficiency, liquidity and transparency by exercising better discipline.

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