Trading and Price Discovery Ray Johnson - Bloomberg Hubie White - City and County of San Francisco Guy Boccasile - City of Ontario Wednesday March 20 th 2019 1
What is price? Which is the most relevant? That depends on the type of security offered? Government Bonds CBBT/BVAL Agency Securities CBBT/TRL1/BVAL Corporate Bonds BMRK/TRL1/MSG1/BVAL Money Markets BOOM/DOCP Comps 2
Government and Agency Securities: Government and Agencies: The most liquid and price transparent. CBBT is the best bid/offer from FIT. Derived from the vast majority of primary dealers. 3
Government Securities: CBBT FIT Composite 4
Agency Securities: CBBT/TRL1/BVAL 5
Corporate Securities: Quoting Convention Spread 6
Corporate Securities: Quoting Convention Spread 7
Money Market: Relative Value Analysis and Benchmarking 8
Money Market: Benchmarking vs Secured O/N Financing Futures 9
Bloomberg U.S. Municipal Bonds Contacts Ray Johnson Fixed Income Specialist 415 617 7014 rjohnson3@bloomberg.net 10
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ADVANCED SESSION OF PRE CONFERENCE: TRADING AND PRICE DISCOVERY GIOA MARCH 20, 2019 Hubert R White, III CFA, CTP - Investment Officer Office of Treasurer and Tax Collector City and County of San Francisco
TRADING AND PRICE DISCOVERY Electronic Trading Overview 13 Extremely efficient for transacting liquid fixed income instruments such as US Treasuries, Federal Agency paper, commercial paper, municipal commercial paper, and corporate notes Examples of available platforms: Bloomberg FIT and BOOM, TradeWeb, and Market Access Increased market transparency Ease of best execution
14 TRADING AND PRICE DISCOVERY Electronic Trading FIT on Bloomberg
15 TRADING AND PRICE DISCOVERY Electronic Trading FIT on Bloomberg
16 TRADING AND PRICE DISCOVERY Electronic Trading FIT on Bloomberg
17 TRADING AND PRICE DISCOVERY Electronic Trading BOOM on Bloomberg
18 TRADING AND PRICE DISCOVERY Electronic Trading BOOM on Bloomberg
19 TRADING AND PRICE DISCOVERY Electronic Trading BOLT on Bloomberg
20 TRADING AND PRICE DISCOVERY INVENTORY AND OFFER MANAGEMENT - IMGR
TRADING AND PRICE DISCOVERY FINRA Financial Industry Regulatory Authority 21 www.finra.org Dedicated to investor protection and market integrity through effective regulation of broker-dealers A not-for-profit authorized by Congress Great resource for market and broker-dealer information Has authority to fine, suspend, or bar brokers for rule infractions
TRADING AND PRICE DISCOVERY FINRA Financial Industry Regulatory Authority 22 FINRA Mission Writing and enforcing rules governing the activities of 3,700 broker-dealers with 634,000 brokers Examining firms for compliance with those rules Fostering market transparency Educating investors
TRADE AND PRICE DISCOVERY FINRA www.finra.org, Tools & Calculators, Market Data 23 Enter Cusip
24 TRADING AND PRICE DISCOVERY FINRA www.finra.org, Tools & Calculators, Market Data
25 TRADING AND PRICE DISCOVERY FINRA www.finra.org, Tools & Calculators, Market Data
26 TRADING AND PRICE DISCOVERY FINRA Price Transparency
27 TRADING AND PRICE DISCOVERY FINRA Price Transparency
All I bring to the party is 30 years of mistakes
Buy in haste, repent at leisure The worst mistakes I ve made in this business have been from acting too quickly. The point here is to try to minimize the risk of overpaying.
Total return approach Attempt to maximize the total value of the portfolio at the end of the month, year, fiscal year or whatever. Like your 401K. My index is the ICE BAML 1-3 year Treasury Index Performance not yield do you care what your 401k yields? Buy bonds that go up relatively Convexity an underrated concept in the municipal arena
Why do I do it this way? 1. I came out of the private sector and it made intuitive sense to me 2. AND, early on I realized my competition wasn t other public entities it was the private sector and that s how they did it 3. I wanted a quantitative method to prove my worth
Me vs the index Me vs the private sector In the last fiscal year, I beat the index by 70 bps, the private sector competition beat their indices by 27-32 bps. In 3 years, I beat the index by 42 bps, private sector beat the index by 16-28bps.. And so on
I want to be able to point to an unbiased, 3 rd party, real dollar evaluation to show my employer how much I m worth to them. I also want to be prepared if a private sector money manager comes in and pitches my city on using their services
My process This only applies to: credit and Agency paper New issue, cheap bonds, special situations and, when opportunities don t exist, I don t force it
I m an opportunistic investor I see a bond that s on my list Then I start the process I am shown a bond
Salesman: January 23 12.:01:39 new- $50mm C 3.05 5/20 a1/a+ offer +45 3.04 ytm. 12:01:47 bid them 3.05% Banknote Watch positive It s a big issue - liquid To his credit, he knows this is the kind of bond I look at. He shows them at +45 and he knows my penchant for countering so he says bid him 3.05 he s trying to get on my good side and anchoring me at the same time
It s a banknote. It s on watch positive. It s virtually a cash equivalent and I needed some short paper. It s close to being money fund eligible which will open up a new universe of buyers. So there s a pretty decent chance that it tightens. It s big and liquid so I can sell it if it tightens
Wednesday, January 23 rd Remember he showed me this bond at 3.05
This is what I saw when I typed QRD <GO> into my Bloomberg. I made the assumption that this was the purchase that the dealer was showing me.
Why/how did I make this assumption? 1. I HADN T SEEN THE MORE RECENT PRINTS AT +50 2. HE HAD 50MM WHICH WOULD SEEM TO BACK UP THE BID 3. AS AN ASIDE, A LOT OF DEALERS DON T LIKE TO TELL YOU THEIR SIZE (UNLESS THEY RE LYING) 4. IT WAS CONVENIENT FOR ME AS I BASED MY BID ON WHERE I GUESSED HE OWNED THEM AND I THOUGHT THEY WERE CHEAP AT THAT LEVEL
Thursday, January 24. 2019 GUY BOCCASILE 07:52:29 C's? Salesman: 07:58:50 +47 07:59: 3.05% work this morn? GUY BOCCASILE 07: 59:31 Nah... GUY BOCCASILE 08:01:09 I'd do 10 @ 3.07 Salesman: 08:03:22 eh, that would be 50 and that s behind where he bot them. GUY BOCCASILE 11:23:17 So, I'm seeing those Citi's at +47 from somebody who doesn't even own them. You gotta have some room, right? Salesman: 11:23:46 somethin, 1 sec 11:28 :28 if i ask for 48 would that work? 11:28:41 he owns them at 50
GUY BOCCASILE 11:28:59 Unless he's lying... Not that a trader would ever lie. Salesman: 11 :29:36 remember, they trade like you. on spread GUY BOCCASILE 11:30:56 Yeah, I got that. But they're tracing at 48,49, 50, so where he owns them isn't what's setting market pricing, if ya know what I mean Salesman: 11:31:06 i do 11:33:26 he will do 48! GUY BOCCASILE 11:44:00 I ll do 10 at 48 if he's stll there Salesman: 11:41:45 28.25 GUY BOCCASILE 11:44:51 I agree
Conclusion Don t bid the street back every single time If you re gonna bid em back - Have a reason, even if it s not a very good one TRACE helps you do that No matter what QRD or ALLQ or BVAL say You don t really know where the market is until you engage the seller/buyer