Monday, July 2, 2012

conduit-based tierd pricer in fixed income, again

In credit bond (specifically muni, corp and ABS) market, I have seen several sell-side quote pricers that output differential prices depending on audience/receipient. Call it double-standard if you like.

Conduit Retail -- mostly HNW clients via financial advisors
Conduit Institutional
Conduit Fidelity (distributor?)
Conduit ECN-Bloomberg
Conduit ECN-TradeWeb
Conduit ECN-Knight

Say the trader has an inventory of an IBM 5.5% May 2020 bond, she sets up quote pricing rules to output slightly different prices for each conduit.

Within the instutional conduit, quote prices may differ based on the business relationship with each client. Some clients get preferential treatment.

Similarly, within the retail conduit the Gold tier HNW client may get preferential prices.

Pricer also applies quantity-based discount. Odd lots discounts is a common practice.

Fidelity case is interesting. It is probably a client rather than an ECN. For credit bonds, Fidelity probably doesn't have inventory or ECN connectivity, so Fidelity connects to big dealers as if the dealers are ECNs.
http://bigblog.tanbin.com/2011/06/ecn-core-services-quote.html shows the 2 core functions of ECN, so Fidelity sends/receives quotes, and sends/receives orders.

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http://www.linkedin.com/in/tanbin