Panellists at FIX Paris said the proliferation of credit axes comes as a result of platforms rating liquidity providers on the basis of the number of axes they stream, rather than actual liquidity quality.
Sell-side and buy-side panellists at FIX Paris voiced concerns about the use of dealer axes on electronic platforms as an indicator of liquidity. They noted that the volume can create a misleading impression of credit liquidity as it does not reflect inventory led liquidity provision and in some instances, it can reward flows towards the wrong counterparties. They argued that current tools and workflows put too much emphasis on the number of axes displayed by liquidity providers, rather than whether those indications reliably translate into trades.
Deniz Mace-Jones, global head of rates and credit product and electronic distribution at UBS, said: “One issue is that there is too much focus on the number of axes – it even feeds into automatic dealer selection as one of the default criterion on some platforms. It would be better to move away from measuring the number of axes and instead start measuring the quality of those axes. If we can agree an industry-wide definition and an industry-wide way of measuring axe quality, then it would produce a better input into counterparty selection, and better outcomes.”
Panellists also mentioned that some platforms require dealers to be axed in a bond to deal in a given paper. This in turns incentivises dealers to post a greater number of axes which may not be backed by actual risk appetite.
Buy-side traders on the panel said that when everyone is axed in a given name, the real challenge for buy-side traders is to work out who will genuinely provide size, support switches or show balance sheet in stressed markets.
Reflecting on this Matthew Coupe, who recently joined the sales trading team at Susquehanna as the market maker started to provide liquidity in credit, told The Desk:
“Axes are an essential part of credit trading and liquidity provision in the space. Unfortunately, perverse incentives for dealers to be axed across the board — with a view to being better ranked by platforms, whether they have inventory positions or not — have degraded axe quality over time.
Retaining ICMA’s definition of axes and best practices, we encourage the ecosystem to rebuild axes quality, around genuine inventory so that the buy side can continue to achieve the quality trading outcomes they expect from axes. That is certainly part of what we intend to put in place at Susquehanna as we grow the business.”
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