Speaker 1: Hello, and welcome to another episode of the Odd Loots Podcast.
Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. Joe, the day
Speaker 1: has come. I know, I know where you're going with this.
Speaker 1: I'm excited, are you? Are you? It's the end of
Speaker 1: odd Lots odd Lots. Wait, the end of odd Lots
Speaker 1: odd Lots, or another way of looking at it is
Speaker 1: it's the odd Lots odd Lots. It's add thoughts all
Speaker 1: the way down, just before we freak everyone out. Is
Speaker 1: odd Lots coming to an end? I'm not no, Okay,
Speaker 1: this is not the end of the Odd Loots Podcast
Speaker 1: as we know it. It is, however, I'm relieved. Yes,
Speaker 1: it's good for both of us. It is, however, the
Speaker 1: episode in which we just gus the possible end of
Speaker 1: odd Lots trading as we know it. Yeah. So this
Speaker 1: is something we've never really talked about, I don't think,
Speaker 1: which is where our name of the podcast comes from.
Speaker 1: I'm not sure if we've ever even really approached that,
Speaker 1: have we No? I think we just sort of threw
Speaker 1: it out there and started recording. But for those people
Speaker 1: that don't know, odd thoughts, it's basically a term that
Speaker 1: describes a order for stocks or bonds of an unusual size.
Speaker 1: Basically often it's it's small orders of bonds or stocks.
Speaker 1: So it's like, if you were to place an order
Speaker 1: for I don't know, seven shares of a company or
Speaker 1: something like that, something weird, that's not the normal increment,
Speaker 1: that would be an odd lot, something irregular. Yeah, exactly.
Speaker 1: And from what I remember, we chose the name, well,
Speaker 1: we're looking for something catchy, and I thought Odd Thoughts
Speaker 1: also sort of described the ethos of the podcast in
Speaker 1: the sense that we cover a lot of slightly random
Speaker 1: ground sometimes right stories that don't typically quite fit perfectly
Speaker 1: into the overall market themes. Because of course, stories that
Speaker 1: fit uh nicely into the overall market stories are covered
Speaker 1: in pretty uh pretty nice depth anywhere. I'm thinking, you know,
Speaker 1: back to our old days of like studying the talking
Speaker 1: about the cattle market, for example. You know, it doesn't
Speaker 1: quite a fit into the typical markets reporting. No, there's
Speaker 1: not enough cattle market coverage, that's for sure. Fish bubble,
Speaker 1: that's right. But the reason we are actually finally talking
Speaker 1: about Oddoughts themselves is because there's been a little bit
Speaker 1: of news on this front. A few weeks ago Bloomberg
Speaker 1: actually reported that I think it was JP Morgan and
Speaker 1: City Group were shutting down their odd Lots trading desks forever.
Speaker 1: So a big, big change for the odd Thoughts market,
Speaker 1: so to speak. Right, so capital oh odd Lots is staying,
Speaker 1: but lower ks oh odd Lots appear to be on
Speaker 1: their way out, or at least, you know, people are
Speaker 1: still going to be making purchases in random increments, but
Speaker 1: the idea of a specific desk devoted to them, those
Speaker 1: seemed to be on the way out. And we want
Speaker 1: to know why exactly, And we actually have the perfect
Speaker 1: guest to explain exactly what is happening. He's a recurring
Speaker 1: Odd Thoughts guest. Uh, formerly at Goldman Sachs. Mr Chris
Speaker 1: White now CEO at Bond Click and Viable Markets. Thank
Speaker 1: you so much for coming on again. Well, it's my pleasure.
Speaker 1: I want to ask though before we get started. Now,
Speaker 1: my the first three time Odd Lots guest. Uh. Yeah,
Speaker 1: We've had a number of two time guests. I think
Speaker 1: you are the first three time. Well I was told
Speaker 1: by your producers that there would be something for me,
Speaker 1: so I'll be waiting after the show. I think it's
Speaker 1: called the Steve Martin Award a special jacket. Maybe exactly. Well,
Speaker 1: I'm world to be here. I'm actually a true fan
Speaker 1: of the Odd Lots podcast. Um, you've got a couple
Speaker 1: of of my all time favorite podcasts in your catalog,
Speaker 1: particularly the one that you did with Uh Andrew Lowe.
Speaker 1: I think the Adaptive Markets podcast was awesome and then, um,
Speaker 1: just so listening to the origin story of how you
Speaker 1: came up with the name was fascinating for me as
Speaker 1: a true fan. But I'm happy to do what I
Speaker 1: think I've been brought in. I'm sort of the designated
Speaker 1: hitter when it comes to talking about innovation and credit.
Speaker 1: Did you think that when you were invited on today's
Speaker 1: episode to talk about the end of Odd Lodge that
Speaker 1: we were going to be doing some sort of retrospective
Speaker 1: and yet you were actually gonna talk about the end
Speaker 1: of the podcast. Okay, so absolutely, and I'm not embarrassed
Speaker 1: to say that. But I received an email from your
Speaker 1: producer saying we want you to talk about the end
Speaker 1: of Odd Lots. And I replied and I said, I'm
Speaker 1: really sorry that the show is going away, thanks for
Speaker 1: having me on the farewell and Uh he was like,
Speaker 1: I don't know what you're talking about, but as you
Speaker 1: can you can see the title end of odd lots
Speaker 1: for this for this one does sound like you guys
Speaker 1: are closing up shop. But I'm so glad to hear
Speaker 1: that it's still going on. And I'm also glad to
Speaker 1: clear up what I think is a misconception about what's
Speaker 1: happening with odd lots. So let me know when you
Speaker 1: guys want to get into it, let's do it. Okay.
Speaker 1: So the art, the articles or the the recent news
Speaker 1: items around the closing up of desks at JP Morgan
Speaker 1: and City are not that they're they're going to stop
Speaker 1: trading odd lots anymore. They're actually doing something that Goldman
Speaker 1: did I think probably about two or three years ago,
Speaker 1: which is really take the human element out of odd
Speaker 1: lots trading in the corporate bond space. And to further
Speaker 1: add to your description, Tracy, an odd lot, I would
Speaker 1: say in the corporate bond market, not all lot odd
Speaker 1: lots are created equal. We would consider there to be
Speaker 1: odd lots and then micro lots, which would be really
Speaker 1: anything below let's call uh two hundred um bonds or
Speaker 1: two hundred thousand notional. So there's sort of an in between.
Speaker 1: And also it's sort of changes depending on what you're trading,
Speaker 1: and and really what you look at is the trade
Speaker 1: size relative to the outstanding size of the bond is
Speaker 1: going to determine whether it's an odd lot. So anything
Speaker 1: below a million in investment grade is generally considered an
Speaker 1: odd lot, but anything below five hundred thousand in high
Speaker 1: yield is generally considered an odd lot. So before we
Speaker 1: jump into this, I want to make sure that there's
Speaker 1: a level setting. So Chris, just on that note, before
Speaker 1: we talk about what is changing when it comes to
Speaker 1: trading of odd lots. Who would be trading odd lots currently?
Speaker 1: Like what type of investors are demanding these sort of
Speaker 1: smaller or irregular size trades. Sure, so, pure retail investors
Speaker 1: in the corporate bond space probably account for less than
Speaker 1: half of a percent of average daily volume. They are
Speaker 1: not like the equities market, and actually the equities market
Speaker 1: of old um I would say anything prior to the
Speaker 1: nineteen sixties was really dominated by the retail investor. That
Speaker 1: is not the way the bond market works. What we're
Speaker 1: talking about is something I would call institutional odd lots,
Speaker 1: and these are really the rebalancing trades. I would say
Speaker 1: that occur in the marketplace where you know, we have
Speaker 1: a hundred and fifty million dollar portfolio, uh, somebody tries
Speaker 1: to sell thousand dollars of it, and so what do
Speaker 1: we have to do. We've got to slice away a
Speaker 1: piece of that portfolio and liquidated. And therefore, you know,
Speaker 1: that creates smaller sized trades in the marketplace. And just
Speaker 1: to give you a sense of the magnitude of this
Speaker 1: activity or odd lots if we call them, uh in
Speaker 1: um the corporate bond space, you know, typically eighty five
Speaker 1: to of the total trades that occur in the market
Speaker 1: on an average daily basis are in sizes less than
Speaker 1: one million. But those trades only account for about fift
Speaker 1: of the volume. So it's a lot of activity, but
Speaker 1: it's it's not a lot of volume. What is it?
Speaker 1: So before we could talk about why it's changing or
Speaker 1: why the market structure around the trading of odd loves
Speaker 1: is changing, let's talk about why it exists in the
Speaker 1: way it currently is. Why would a bank have had
Speaker 1: to have had a dedicated desk to trade these such
Speaker 1: that they couldn't just be traded through the normal route.
Speaker 1: Great questions. So if you look at the actual behavior
Speaker 1: of electronic trading in the corporate bond space, the dominant
Speaker 1: protocol is something called an RFQ, which I would best
Speaker 1: describe to your listeners is it's an electronic phone call,
Speaker 1: and it's you, as a as a by side asset
Speaker 1: manager being able to say to the market, Hey, I'm
Speaker 1: looking for a bid on IBM five year bonds. Who's
Speaker 1: out there interested in giving me a bid? And so
Speaker 1: making that electronic phone call to ten dealers twenty uh
Speaker 1: nine d dealers. At some at some point in time,
Speaker 1: that became the way to trade a certain type of
Speaker 1: or or to way to execute certain types of trade
Speaker 1: in the corporate bond market. But if you look a
Speaker 1: little bit further, the most uh the most popular way
Speaker 1: to trade odd lots in through something called a list form,
Speaker 1: which would be a bid wanted in competition list or
Speaker 1: an offer wanted in competition list. We call it b
Speaker 1: wicks and oh wicks in the business. And what that is,
Speaker 1: it's a list of individual accusips that you want to trade.
Speaker 1: And typically these lists, the individual line items are pretty small.
Speaker 1: You know, five bonds here, twenty bonds there. Now, these
Speaker 1: lists used to be processed manually, and typically a list
Speaker 1: would take I would say maybe three to four hours
Speaker 1: to process from front to back. And the dominant electronic
Speaker 1: trading system and credit uh place I worked for called
Speaker 1: market Access. Their their claim to fame, they're They're. What
Speaker 1: they solved was turning that process, the list trading process,
Speaker 1: into something that was leveraging technology. And nobody could deny
Speaker 1: the efficiency of turning something that took four hours into
Speaker 1: ten minutes. Nobody could deny the benefits of it. So
Speaker 1: imagine you're an asset manager. You need to buy your
Speaker 1: sell a group of bonds. An electronic system is the
Speaker 1: best way to do it because you can tell a
Speaker 1: bunch of people these are the bonds I'm interested in trading,
Speaker 1: and the system will then take all of the best
Speaker 1: bids and offers and present them back to you within
Speaker 1: a ten minute period and then you can just say
Speaker 1: trade them all and you go about your day. So
Speaker 1: I think the last time I heard it about of
Speaker 1: the volume on market Access was comprised of these lists.
Speaker 1: So talk to us then about the decision by JP
Speaker 1: Morgan and City Group to disband the actual odd lots
Speaker 1: trading desk. What do you think is going on there
Speaker 1: and what are they eventually moving towards. So uh markets
Speaker 1: are adapting and changing, and so the the environment for
Speaker 1: trading electronically has had some radical shifts in the corporate
Speaker 1: bond space or meaningful shifts permanent ones, and those shifts
Speaker 1: are now changing the validity of having human beings actually
Speaker 1: performed the odd lot trading function on the cell side,
Speaker 1: because it's a big coming less profitable. I believe one
Speaker 1: of the biggest changes to the biggest changes actually would
Speaker 1: be the just growth in in in passive funds. You know,
Speaker 1: so e t fs are huge component of electronic trading,
Speaker 1: and they've been growing. I think that the fixed income
Speaker 1: et F a u UM just surpassed one trillion recently
Speaker 1: I saw, so you know, it's it's still not as
Speaker 1: big as the actively managed funds that are out there,
Speaker 1: not even close, but it is becoming significant. And if
Speaker 1: you think about what is an e t F, it's
Speaker 1: people trading these baskets of bonds that are supposed to
Speaker 1: represent an index. So that's been driving the activity, it's
Speaker 1: really been pushing it. And then the other thing that's
Speaker 1: happened is the systems used to be set so that
Speaker 1: you know, a bye side asset manager could send inquiries
Speaker 1: out only to the cell side, so only two dealers,
Speaker 1: and so those are the people you could make your
Speaker 1: phone calls to and say, hey, do you have a bid?
Speaker 1: But now these systems have started creating what's called all
Speaker 1: to all our few trading, which is I'm black Rock
Speaker 1: and I could send an inquiry that could show up
Speaker 1: on pimco's desk. And the impact of that is obviously
Speaker 1: greater competition. And so you're going from from particularly with
Speaker 1: market Access, a system that probably had about eighty dealers
Speaker 1: on it that could respond to your inquiry if your
Speaker 1: black Rock, to a system that now has seven people
Speaker 1: on it that could potentially respond to your inquiry. Now,
Speaker 1: what this does for just odd lot trading or really
Speaker 1: any market is more people are in the market, it's
Speaker 1: going to become more competitive, and certain trading styles are
Speaker 1: going to go away. And I think that's where we
Speaker 1: get to this question as to whether or not human
Speaker 1: beings on the seal side should be handling odd lot
Speaker 1: trading in a manual fashion. Chris, you mentioned the notion
Speaker 1: of basically by side players getting in on these platforms
Speaker 1: and being able to deal with other by side players.
Speaker 1: And this is probably I would say the biggest difference
Speaker 1: in the past three years or so since you first
Speaker 1: started coming onto odd Lots. The episode is that we
Speaker 1: do have this all to all participation when it comes
Speaker 1: to corporate bond dealing, and a lot of people expected
Speaker 1: that would never happen because dealer banks basically wouldn't want
Speaker 1: to give up a really lucrative business i e. Facilitating
Speaker 1: all these bond trades. How did it come to pass? Like,
Speaker 1: what was the breakthrough moment here? Well? I think the
Speaker 1: first thing is you is it really lucrative. It's on
Speaker 1: a relative basis market making and odd lots is not uh,
Speaker 1: something that major banks can can really you know, profit
Speaker 1: from in the same way they would from from institutional trading,
Speaker 1: so you know bespoke or or by lateral trades of
Speaker 1: significant size. That's the engine that drives profit profitability. The
Speaker 1: other thing is you have to look at the quality
Speaker 1: of h order flow that you're seeing on these platforms.
Speaker 1: It's it's particularly low quality these lists for example that
Speaker 1: gets sent out. I mean everything's in competition. A lot
Speaker 1: of times it's in bonds that are actively traded, so
Speaker 1: the spreads have already collapsed. So you know, there's a
Speaker 1: there's a lot of energy that goes into responding to
Speaker 1: trades on these systems, and so you know, you have
Speaker 1: to look at what the output is. The other thing
Speaker 1: that I think people are not aware of is that
Speaker 1: when you think about automated trading or electronic trading and
Speaker 1: other asset classes, especially from a market making standpoint, you
Speaker 1: think of it as being a very low risk endeavor.
Speaker 1: And I can tell you that if you're going to
Speaker 1: run a meaningful odd lock desk in which you're going
Speaker 1: to be responding consistently as a dealer, you're probably gonna
Speaker 1: have to have, you know, a balance sheet anywhere. I
Speaker 1: mean in minimum you know, two million in up is
Speaker 1: what you'd have to have in terms of balance sheet
Speaker 1: set aside, because the bonds don't turn over that quickly.
Speaker 1: So if you're going to be a player, then you've
Speaker 1: got to hold positions and so you know, you've got
Speaker 1: to balance a bunch of things here, like is that
Speaker 1: balance sheet better used in other places? Is this trader
Speaker 1: better and there? And they're sort of human judgment better
Speaker 1: applied to other areas of the market that could make
Speaker 1: more money, And I think that's that's one of the
Speaker 1: things that's sort of driving this decision um is what's
Speaker 1: the best way to deal with low quality order flow?
Speaker 1: And I think it's you know, put a computer around it.
Speaker 1: So you mentioned this rise of all to all trading
Speaker 1: and this idea that a bye side player could put
Speaker 1: out some sort of request and it lands on the
Speaker 1: desk of other by side players, and theoretically someone listens
Speaker 1: to that and like, that's great, cut out the middleman,
Speaker 1: and who wouldn't want that? And tighter spreads and all that.
Speaker 1: It sounds really nice, But what are the drawback x
Speaker 1: to that? And I think one of the first times
Speaker 1: we talked, we were talking about bond market liquidity and
Speaker 1: that was probably from time to time becomes a source
Speaker 1: of concern. And can the all to all environment offer
Speaker 1: as much liquidity as dedicated desks that hold balance sheet
Speaker 1: that are there too. What are the pluses and minuses
Speaker 1: of this new arrangement and how big can it really get? Sure?
Speaker 1: So actually I wrote a blog about this called big
Speaker 1: foot and by side Liquidity, the theme being that these
Speaker 1: are two things that people ardently believe in, but there's
Speaker 1: no physical evidence that either one of them actually exists
Speaker 1: in a meaningful way. So you know, the the market
Speaker 1: Access in particular has been going after this all to
Speaker 1: all protocol for seven years now, and they're the most
Speaker 1: well networked apparatus for facilitating trading amongst customers. I think
Speaker 1: that nobody would disagree with that. However, after seven years
Speaker 1: agoing after it, I think that if you look at
Speaker 1: the pure numbers, it's less than two percent of average
Speaker 1: daily market share is trading on a by side to
Speaker 1: by side basis, and this is based on market access
Speaker 1: is numbers. The other thing that we're not seeing is
Speaker 1: the details of what is trading on a by side
Speaker 1: to by side basis. I would imagine that it's the
Speaker 1: bonds that are easiest to trade. So I think where
Speaker 1: the the the sort of misunderstanding comes into places that
Speaker 1: by side to by side trading would somehow improve overall
Speaker 1: liquidity conditions. When I think that by side to by
Speaker 1: side trading has done in not just the corporate bond market,
Speaker 1: but every other market before it, it's just allowed you
Speaker 1: to trade the things that were easier to trade more easily. Now,
Speaker 1: is it helpful, absolutely, um, But is it addressing some
Speaker 1: of the the issues that I see on the horizon
Speaker 1: for this market. I don't think so in any way,
Speaker 1: shape or form, and mainly because the things that are
Speaker 1: people that people are having difficulty trading in this market,
Speaker 1: the liquidity issues have never been in the things that
Speaker 1: I suspect are are trading between customers. The liquidity issues
Speaker 1: are occurring are occurring when you're trying to trade something
Speaker 1: that early trades and you're trying to trade a lot
Speaker 1: of it. And you know, that's where I think there's
Speaker 1: a hole in the reasoning that this has any meaningful
Speaker 1: improvement on the overall state of the market. Yeah, So, Chris,
Speaker 1: I wanted to sort of press you on this point
Speaker 1: because from time to time there is that bond market
Speaker 1: liquidity issue that Joe brought up, and there's also the
Speaker 1: notion that at some point the credit market is going
Speaker 1: to experience some sort of massive sell off event after
Speaker 1: years and years of rallying and arguably seeing you know,
Speaker 1: over inflated valuations and and things like that, and people say, well,
Speaker 1: a lot of the bond trading innovation that we've seen
Speaker 1: is sort of getting ready for that moment. So people
Speaker 1: need any outlet to trade bonds in a crisis that
Speaker 1: they can get their hands on. But when it comes
Speaker 1: to that big event, if it happens, how much are
Speaker 1: those different types of trading platforms available actually going to
Speaker 1: relieve pressure on the market. Yeah, this is we sort
Speaker 1: of have this waiting for Godot approach to electronic trading where,
Speaker 1: thanks to you know, modernized as at classes, people in
Speaker 1: fixed income look at electronic trading as the savior and
Speaker 1: it's going to fix all of the problems, and it's
Speaker 1: just it doesn't really, it doesn't really work that way.
Speaker 1: I don't think that. My person belief is I don't
Speaker 1: think that an electronic trading system addresses the systemic problems
Speaker 1: that are currently present in the corporate bond market, and
Speaker 1: those systemic problems are The market is almost doubled in
Speaker 1: size since two thousand and eight, but the way that
Speaker 1: it's grown, it's gotten a lot riskier. The entire universe
Speaker 1: of triple B credits, which are you know, bonds that
Speaker 1: could be moving into high yield territory very easily. That
Speaker 1: universe is now larger than the entire investment grade market
Speaker 1: was in two thousand and eight. So these you've got
Speaker 1: a bigger market, you've got a riscue market. And the
Speaker 1: other thing that's happened is the length of the market.
Speaker 1: The duration of the market has gotten um a lot longer,
Speaker 1: so you know, typical you know, typically between uh, you know,
Speaker 1: a new issue bond was about seven point five years
Speaker 1: in maturity. Now typical typically the maturities are sixteen years.
Speaker 1: So all of that is a big dangerous sign. Now
Speaker 1: we keep on waiting. It's almost like waiting for the flood,
Speaker 1: Like when is when a right credit market is going
Speaker 1: to correct? Well, one thing that you've seen, you've seen
Speaker 1: actually central banks turntail on their de you know, de
Speaker 1: leveraging their balance sheet or the de risking their balance sheet.
Speaker 1: And the reason why is, I think what you're seeing
Speaker 1: now is, you know, the years and years of quantitative
Speaker 1: easing have created an environment where if you start removing
Speaker 1: the sugar from the system of this market, a bunch
Speaker 1: of companies that are really on the edge because they
Speaker 1: rely on really cheap debt that is facilitated by quantitative easing,
Speaker 1: a bunch of those companies are going to have problems
Speaker 1: fine dancing themselves, and that may start the cascading effect
Speaker 1: of what we're looking at in terms of the Great
Speaker 1: Flood So when I look at what's what's happened with
Speaker 1: central banks where they were quite adamant that they were
Speaker 1: going to stop direct bond buying and that that they're
Speaker 1: going to try to return into the Fed funds rate
Speaker 1: to something that resembles what we all grew up with. UM.
Speaker 1: Now you're hearing a lot of caution around that because
Speaker 1: I think that we're seeing such an immediate reaction to UM,
Speaker 1: you know, changes in central bank policy and how it
Speaker 1: affects the overall market. Now, when when it does start
Speaker 1: to happen, when you do see people needing to move
Speaker 1: large positions around UM that are that don't trade that often,
Speaker 1: that that activity is not on any electronic trading platform
Speaker 1: right now. So I don't know why we would assume
Speaker 1: that all of a sudden, the electronic trading platforms are
Speaker 1: going to be the destination of choice for UM. When
Speaker 1: when this UH pronounced volatility starts starts taking form, So Chris,
Speaker 1: just so that we don't leave it on UM a
Speaker 1: sort of does master in the bond market. Note when
Speaker 1: when you survey, when you survey UM the structure of
Speaker 1: corporate bond trading of the market, and you look, you know,
Speaker 1: say five or ten years into the future, what do
Speaker 1: you think it's going to look like. Well, I've made
Speaker 1: a bet that it's going to look a lot more
Speaker 1: reliable from a liquidity standpoint. And you know, I think
Speaker 1: one of the earlier podcasts I had with you guys
Speaker 1: when we talked about the modernization of the market and
Speaker 1: what needs to be built, and I ended up building it.
Speaker 1: You know, since the last time I think it was
Speaker 1: on here, we've made significant progress with building the first
Speaker 1: consolidated quote system for the bond market. And consolidated quotes
Speaker 1: are sort of the the fertilizer that you need in
Speaker 1: order for the market to grow, the garden to grow.
Speaker 1: And what it what you're doing is you're you're putting
Speaker 1: high quality pre trade data into the market and making
Speaker 1: it readily available for everyone. Now why is this important
Speaker 1: Because you must eliminate ambiguity around or unnecessary ambiguity around
Speaker 1: the value of something in order to improve its reliability
Speaker 1: to trade it. So what we have is a market
Speaker 1: that has grown very quickly, but especially on the side
Speaker 1: of the market maker, their access to pricing data has
Speaker 1: not improved. So you're asking a market maker to step
Speaker 1: up consistently and provide risk transfer, to provide liquidity to
Speaker 1: the buy side. But I think one of the major
Speaker 1: challenges for the market maker is they don't have enough
Speaker 1: market data to do so. And so, so, Joe, Joe
Speaker 1: looks like you have a question on this. Yeah, I
Speaker 1: just so just you know, going back to what you
Speaker 1: were talking about the cell side having to allocate balance
Speaker 1: sheet in order to uh, you know, remain a viable
Speaker 1: player in these markets. What you're saying, basically is the
Speaker 1: only way they're actually going to do that and continue
Speaker 1: to be a part of that and to provide more
Speaker 1: liquidity or the liquidity of the market needs is if
Speaker 1: they can be comfortable that when someone calls up in
Speaker 1: one of these electronic calls for quote or for a
Speaker 1: um for a trade, they have to have some feel
Speaker 1: at the ready of what a good price should be.
Speaker 1: And that's what you're saying, is this sort of necessary
Speaker 1: ingredient to provide and so what is that information look
Speaker 1: like that allows them to do that. What's so fascinating
Speaker 1: about your question is like it's right in front of us.
Speaker 1: Any modernized market that you look at, the market makers
Speaker 1: know what all of the prevailing prices are around them.
Speaker 1: They know the prices from other market makers so that
Speaker 1: they're able to properly calibrate their price. You do not
Speaker 1: see markets that are You do not see any market
Speaker 1: that's considered modern without some sort of apparatus that makes
Speaker 1: it easier for the market maker to to be able
Speaker 1: to make markets. We do not have a visible market
Speaker 1: in the corporate bond space. There's no definitive best bid
Speaker 1: best offer that's been established, and so without that, you
Speaker 1: have to put yourself in the seat of a market maker.
Speaker 1: Somebody calls you up and says, hey, Joe, I see
Speaker 1: that you've got this bid for you know whatever, IBM
Speaker 1: five year bonds. I'd love to sell you twenty million
Speaker 1: of them. What's the first thing that you're gonna want
Speaker 1: to know? Where's my bed? In the context of everyone else?
Speaker 1: Am I too high? Am I? You know? Am I?
Speaker 1: Through the offer side? All of those things, and um,
Speaker 1: the dealers simply just don't have access to that information
Speaker 1: in the marketplace. What we've seen historically is when you
Speaker 1: give market makers that access, they trade with more confidence.
Speaker 1: They're they're able to get better return on their balance
Speaker 1: sheet because they can manage the risk better, and therefore
Speaker 1: they're willing to offer more reliable institutional liquidity. So this
Speaker 1: is not an original idea. And I think if people
Speaker 1: go back in the Odd Lots archives and they look up,
Speaker 1: I think it was called the the you know something
Speaker 1: about the modernization of of of markets. We talked about
Speaker 1: this in length, like what happened when the equity market
Speaker 1: did this and what happened to those market makers? So
Speaker 1: what do I see in five to ten years. I'm
Speaker 1: pretty confident that because of the environmental shifts that have
Speaker 1: occurred in the market, the adaptations that are going to
Speaker 1: occur as dealers are going to become much more savvy
Speaker 1: around the incorporation of data into how they provide liquidity
Speaker 1: to customers. They have to. They're being forced the the
Speaker 1: the limited amount of balance sheet they have to dedicate
Speaker 1: to a market that's a lot bigger requires that they
Speaker 1: have more honed risk management and inventory management techniques. And
Speaker 1: the only way that you can manage your risk and
Speaker 1: manage your inventory is if you've got access to the data.
Speaker 1: So just to put it in context for you so
Speaker 1: you can tie it all together. If I have all
Speaker 1: of the available pricing information in the market as a dealer,
Speaker 1: and I have i'm long or have on my books
Speaker 1: a large position, I now know where I have to
Speaker 1: offer the bonds consistently in order to give me the
Speaker 1: best possible chance to get out of the position. And
Speaker 1: this is what dealers are looking for, Like I need
Speaker 1: those guide posts. You give me the guide posts that
Speaker 1: I'm gonna be willing the next time you want to
Speaker 1: trade a big position, I'm gonna I'm gonna be willing
Speaker 1: to take it on my books because I at least
Speaker 1: have some semblance of an idea of how I can
Speaker 1: get out of it without me having to do a
Speaker 1: forced or panicked sale. And you know, these aren't the
Speaker 1: things that are being i think, discussed openly, but you
Speaker 1: can see them in the numbers in terms of the
Speaker 1: the the overall revenues declining for US corporate bond market
Speaker 1: making year after year after year. I think that that's
Speaker 1: just telling you, hey, the environment shifted. We've got to
Speaker 1: do something differently. And I think the dealers have shown
Speaker 1: in other another asset classes that you know, after a
Speaker 1: few years of taking on the chin, they start to
Speaker 1: rethink their business model. And I think a data driven
Speaker 1: business model is right on the horizon for for the
Speaker 1: cull Side. All right, Well, Chris, it was lovely having
Speaker 1: you on the show for the third time. You've made
Speaker 1: the odd lots, odd lots possible, so thank you, and
Speaker 1: we'll have to have you on again at some point
Speaker 1: so you can retain your title of the most frequent
Speaker 1: add thoughts guest. Yeah, I'm going to also get my
Speaker 1: Steve Martin arrow through the head apparatus for for the
Speaker 1: next one. I think it's absolutely a pleasure to be
Speaker 1: on the show and you guys are doing great work.
Speaker 1: Keep it quirky, keep it odd, and I look forward
Speaker 1: to being back. So Joe, I don't even think I
Speaker 1: have to tell you, but I really enjoyed that conversation.
Speaker 1: It feels so nice to be talking about market structure again,
Speaker 1: and not just any market structure, but the structure of
Speaker 1: the corporate bond market, which is something that you know,
Speaker 1: I in particular, I've been watching for some time now. No,
Speaker 1: I really liked that episode two. It felt like a
Speaker 1: classic topic for us. So it's kind of like double
Speaker 1: e meta because a it was, you know, play on
Speaker 1: our name, but more importantly, it felt right in our
Speaker 1: wheelhouse of something that we should be talking about. So
Speaker 1: I always learn a lot talking to Chris, And you know,
Speaker 1: I don't know the corporate bond market nearly as much
Speaker 1: as you do, but I find uh that sort of
Speaker 1: I mean that goes without saying, but I find like,
Speaker 1: just like thinking about these questions of market structure very interesting.
Speaker 1: And what he was saying at the end about prices
Speaker 1: is something that I think about a lot, and probably
Speaker 1: inspired by past conversations with him, which is that I
Speaker 1: think we sort of take prices for granted. Prices appear
Speaker 1: on the screen, but someone had to get them and
Speaker 1: someone had to put them together, and that process itself
Speaker 1: is still being worked on. Is just a really interesting idea. Absolutely,
Speaker 1: and sort of on a related point, but I thought
Speaker 1: what Chris was saying about, you know, this notion that
Speaker 1: market structure can suddenly fix all of the markets ills
Speaker 1: is just totally out of whack. And if you're actually
Speaker 1: worried about a bubble in corporate credit, then I don't
Speaker 1: think having a very sleek training platform is really going
Speaker 1: to help you much fundamentally with that issue. It might
Speaker 1: help at the margins, but you know, ultimately you're talking
Speaker 1: about overvaluations and when the time comes to sell, it
Speaker 1: seems really unlikely that a training platform is going to
Speaker 1: help you. Absolutely and just intuitively, intuitively, it sounds very attractive,
Speaker 1: this idea that's like everyone can just you know, cut
Speaker 1: out the middleman and trade with each other on some
Speaker 1: sleek electronic platform. But what Chris is saying and just
Speaker 1: sort of what's you know, very obviously different about the
Speaker 1: corporate bond market is just how diverse it is and
Speaker 1: how much of a range of different assets there are,
Speaker 1: and so Yes, to Chris's point, it makes a lot
Speaker 1: of sense that one of these new platforms could facilitate
Speaker 1: easier trading and the really liquid stuff that everybody might
Speaker 1: have access to. But where there but there's so much uh,
Speaker 1: you know, esoteric paper out there in the bond market
Speaker 1: and different versions of uh any given companies paper that
Speaker 1: that problem is still needs to be solved. Is a
Speaker 1: really good one and that's probably and just this idea
Speaker 1: that also that's stad about um, how much bigger the
Speaker 1: junk market has grown and how much longer and duration
Speaker 1: it's gotten so that the nature of the market itself
Speaker 1: has gotten significantly riskier over the last ten years is
Speaker 1: a really good one and a really good one to
Speaker 1: think about. You know this idea of an inevitable crisis
Speaker 1: if it happens right. The triple B portion of the
Speaker 1: investment grade market is what he was talking about, and
Speaker 1: that's something that we've seen crop up a lot in
Speaker 1: recent commentaries and worries about overheating in the bond market.
Speaker 1: So we should definitely do some more episodes on that think.
Speaker 1: Thank you for clarifying. Okay, sorry, no, I appreciate all right.
Speaker 1: This has been another episode of the Odd Lots podcast.
Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at
Speaker 1: Tracy Alloway and I'm Joe Wisn'tal. You could follow me
Speaker 1: on Twitter at the Stalwarts and you should follow Chris
Speaker 1: on Twitter at Friday Newsletter and check out the Inside
Speaker 1: Market blog at www dot bond click dot com, and
Speaker 1: of course follow our producer on Twitter to for Foreheads.
Speaker 1: He's at foreheads t, as well as the Bloomberg head
Speaker 1: of podcast, Francesco Levy at Francesca Today. Thanks for listening
Speaker 1: to