September 24, 2009
As usual Joel hits the nail on the head in contrasting pragmatic, delivery focused “duct tape programmers” with perfection obsessed abstraction astronauts who never ship because they can’t stop polishing and honing. It’s those duct tape devs we’re always looking to hire for front office trading systems, cos time to market is everything in our game…
September 23, 2009
I got an email query on cover prices for RFQs after my last post, so I went back to some old analysis of RFQs I did in 2006 to check. My code was getting the cover price from ION MarketView’s trading chain for the RFQs that traded with us on Bloomberg and TradeWeb. If the client traded away, with another dealer, or rejected, we would see a cover price of zero. This asymmetry allows a dealer to calculate excess winning margins for RFQs won, but not to see how far off the best price the dealer is for RFQs that trade away.
The excess winning margin is the difference between a winning price and the cover price. If the gap is too great, then maybe the dealer is suffering from a form of the winners curse. The obvious response is to make pricing less aggressive. But the fact that losing dealers in an RFQ don’t see the winning price deters that. In the face of that asymmetry the right solution is probably to have real time feedback between hit ratios and pricing aggression…
September 22, 2009
Neat doc here from TradeWeb on protocols for CDS execution. From it you can imply the definition of “cover price”: the next best price that didn’t execute. As you can see in the doc, or in a TradeWeb or Bloomberg terminal, a client can see competitive quotes from up to 5 dealers. But while an RFQ is in flight, the dealers can’t see each others quotes. When the RFQ ends with an execution, as opposed to a client rejection, then the winning dealer gets to see the cover price – the price they beat. But the losing dealers don’t get to see the winning price, so there’s a fundamental asymmetry there.
So what are the reasons for that asymmetry ? That’s an interesting question. I’m guessing that it’s motivated by restricting the amount of information that dealers have about each others pricing. Dealers are paranoid about other dealers figuring out their pricing. Another motivation is to keep the dealer pricing keen. If dealers could see each others prices, then they would slack off on aggressive prices, making them only just good enough to win a trade. In the face of those two powerful motivations, I do wonder why ECNs show the cover price to the winning dealer at all.
The RFM model outlined in the TradeWeb doc is interesting too. The RFQ and RFS models operated by Bloomberg and TradeWeb for fixed income trading require the client to declare whether they’re buying or selling up front. RFM is a break with that. If it were applied to the rates markets I wonder whether it would lead to keener pricing or not ?