Dealers may be ‘kept honest’ by increased market transparency, according to some buy-side credit traders, but expectations are tempered by the fluidity needed around advertising of their trading appetite.
Concerns around the quality of dealer axes, essentially adverts for their capacity to trade specific inventory, often at certain sizes, surfaced at the FIX EMEA Trading Conference in the first week of March. Actual traded prices may diverge from advertised rates. Spamming the market with adverts to get attention can create more noise than signal.
Dealer axes today can vary in quality, timeliness, and format. Analysis by the International Capital Markets Association (ICMA) has highlighted that inconsistent communication and non‑standardised fields make it difficult for investors to compare axes across dealers, reducing their usefulness and skewing flow toward firms with better dissemination channels.
When banks’ axes are not actionable, buy-side desks find they are disclosing their trading intentions fruitlessly. Effective axe dissemination increases the conversion rate for approaches to dealers. Tradeweb has historically reported double figure improvements in completed trades when request-for-quotes (RFQs) are directed to axed liquidity providers.
Greater bond‑market transparency could level out the problematic dealer behaviour around axes, by reducing the information asymmetries that currently allow a small subset of dealers to abuse pre‑trade signalling.
The core mechanism is simple; when more participants can see standardised bond pricing data, dealers are likely to be axed closer to published price, and that should tighten bid-ask spreads, reducing the cost of trading for the buy side.
There are two big ‘buts’.
The first, and traders are cognisant of this, is that no bank is going to make a rod for its back by publishing axes that are fully actionable for a lengthy period. Even if pricing on axes moves somewhat towards published prices, if individual ISINs and CUSIPs only trade occasionally, with relatively large delays between them, traded prices will still fade in relevance over time.
The second is related to an axe’s function. Axes are a starting point for negotiations to allow traders on the buy- and sell-side to assess how much needs trading and where the two parties can get to on price and size.
As a result, an axe should not necessarily be an executable function, but should be indicative, to support those exploratory conversations.
Consequently, the likelihood of axe prices moving significantly as s result of increased transparency is likely to be slight.
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