A new study of fixed-income transaction costs in Europe found that costs and execution quality are similar at large and small brokerage houses.
"It's not a matter of size," said Christoph Kesy, project manager at Alpha Portfolio Advisors GmbH in Bad Soden, Germany. "You have small houses with extremely good execution and large houses with very good execution also."
The investment consulting firm recently completed a study of transaction costs in European bond trading for the fourth quarter of 2003, after some of the firm's clients, which had been involved in equity transaction cost studies, asked for it.
Mr. Kesy said his study, which analyzed trading data from 742 liquid European bonds including corporates and government issues, was the first of its kind to measure overall costs, including realized bid-ask spreads, timing costs and custodian fees.
But fixed-income transaction cost analysis is not new.
James Bryson, president of New York-based trade analysis firm Elkins/McSherry LLC, said his firm has been offering fixed-income trade cost analysis since 1997 and two years ago added global fixed-income analysis to the lineup.
Still, Mr. Kesy said his study provided detailed analysis of the drivers of bond pricing and evaluation of individual asset manager's transaction process and best execution capability. In addition, he said the firm's clients — 11 European asset managers including big names such as Allianz Dresdner Asset Management, Deutsche Asset Management, General Cologne RE Capital and Lazard Asset Management — doubted such analysis could be done.
"We found out it is possible to measure overall transaction costs for fixed income with a high degree of statistical significance," Mr. Kesy said. "We found that the bond market — with no central marketplace like the New York Stock Exchange or Nasdaq — is quite efficient. In general, spreads are low."
The realized bid-ask spread, defined in the study as the difference between the trade price and the fair market midprice at the time of order execution, was 2.6 basis points for the universe of European bond transactions analyzed. For European Monetary Union government bonds, the realized spread was two basis points; for non-EMU government bonds it was three basis points; for jumbo bonds it was 2 basis points; and for European corporate bonds, it was 6.7 basis points, according to the study.
Transaction cost experts said the lack of a central marketplace for bond trading has been the major stumbling block to the development of transaction-cost analysis.
"The fixed-income market is not exchange-driven," Mr. Bryson said. "It's a dealer market, so to capture data has been difficult over the years."
GovPx Inc., New York, provides some pricing data on U.S. Treasury securities, while the National Association of Securities Dealers has begun to provide corporate bond trading information. Mr. Bryson also said that in the United States, data flow has improved over the last few years because the Securities and Exchange Commission is pushing the industry to capture and disseminate more bond trading data.
"Two things have opened this field up," said Wayne Wagner, chairman of Plexus Group, Los Angeles. "The NASD created TRACE (Trade Reporting and Compliance Engine for corporate bonds), and there has been pressure from the SEC to make this market more transparent.
"All of a sudden, where there was no data, now there's rich data," Mr. Wagner said.
He said Plexus has seen tremendous interest in fixed-income transaction analysis, and the firm is close to unveiling a system similar to its equity transaction cost analysis, which reviews equity trading costs on a quarterly basis.
"It's very dangerous to say ‘I know equities and therefore I know bonds,' so there's some adaptation that needs to be done," he added. "But we've combined some hands-on knowledge of the bond market with the experience of having done thousands of these evaluations. I think it will come together very quickly."