October 17, 2017 • Institutionalinvestor.com CORNER OFFICE What Renaissance Technologies Has That You Don’t… …besides billions of dollars, is nearly-perfect bond pricing information. Good news: that playing field may soon be leveled. BY JULIE SEGAL uantitative hedge fund firm Re- and give out prices. That’s the widget through its electronic platform direct- naissance Technologies, found- they produce,” he adds. Dealers in an ly informing prices. With an 18 percent ed by mathematician James over-the-counter market benefit from a market share in high-grade credit, Simons, has had near real-time limited flow of information that allows for instance, MarketAxess sees a big Qprices on corporate bonds them to have the upper hand in trading. cut of total trades. Pre-trade predic- and other debt for years. Although that That has started to change. With tions, or reference prices, are updated doesn’t sound particularly edgy at a time banks stepping back from their cen- every 15 seconds. when autonomous driving cars are being tral role as fixed-income market mak- “Reference prices incorporate ev- tested on roads, the ability to call up bond ers since 2008, start-ups and others erything we know about the market up values on even a small slice of the credit have eagerly filled the vacuum with to the second,” says Krein. Important- universe before placing a trade — a bond electronic trading platforms and other ly, he emphasizes that pre-trade pre- ticker tape, essentially — is innovative. services. Now new venues are sucking dictions are simply that — predictions That’s because Renaissance has that up bond trading data and getting closer — and not the price that the buyer or ability, and most other investors don’t. to spitting out accurate prices. In bond seller will get. However, Market When it comes to the markets, those speak, that means pre-trade transpar- Axess is measuring the gap between its with the best information win. Inves- ency is getting better. predictions and reality. The company tors have historically traded credit in There have been false starts. analyzes trades between institution- an over-the-counter market; they call Launched in 2009 with backing from al clients and dealers that are worth a couple of dealers, get prices, and private equity firm Warburg Pincus, $150,000 or more and reported to reg- choose the one with the best deal. Un- Benchmark Solutions hoped to pro- ulators through the TRACE system like stocks that trade on exchanges that vide constantly updated intra-day as well as trades on MarketAxess. Ac- continuously broadcast prices, there bond prices using advanced computing cording to Krein, the difference be- hasn’t been a central place to find bond techniques. Benchmark, which closed tween its predictions and the actual values. For good reason: There are tens down in 2013, may have been too ear- execution price is, on average, zero. Of of thousands of outstanding bonds and ly: Machine learning, data science, course, that doesn’t mean MarketAxess complex securities, with many not and the sheer volume of data have ad- is predicting the price point for indi- trading for months or longer. vanced significantly since then. Clients vidual trades with perfect accuracy — “Pricing is at the heart of any mar- themselves were also still happy to call not even Renaissance can do that. ket,” says David Krein, head of research dealers for prices at the time. Start-ups are also trying their hand at MarketAxess, which launched in MarketAxess recently started calcu- at pricing. Trumid Financial, launched 2000 and offers electronic trading for lating pre-trade prices. Its edge comes in June 2014 and backed by ven- global credit. “Dealers take phone calls from the execution data that flows ture capitalist Peter Thiel and October 17, 2017 • Institutional Investor George Soros, has been quickly gain- will do something similar so we can to check on the computers’ algorithms. ing volume, which will give it access to see how good these products ultimate- IDC believes models can’t do the job more data and in turn more accurate ly are,” he says. on their own. pricing. On top of its May acquisition Interactive Data Corp., which pro- Mark Heckert, head of pricing and this year of competitor Electronifie, vides financial market and other infor- analytics at Intercontinental Exchange, Trumid also got an investment from mation, built a very profitable business says its history in the business gives Deutsche Boerse. The two are planning out of the lack of transparency in the it a big advantage over new competi- a joint venture in Europe. bond market. Acquired by Interconti- tors. Specifically, it has a vast amount Jason Quinn, head of product de- nental Exchange in 2015, IDC was for of data with which to train computers velopment, says Trumid is offering a a long time one of the only providers of designed to look for patterns or deal continuous pricing service for corpo- estimates of bond prices at the end of with “regime shifts” — large and abrupt rate bonds based on quantitative algo- every day that mutual funds and oth- changes, like 2008. rithms on 22,000 issues. The start-up ers needed to value the securities they With all the bullishness about elec- is posting the models and the three held in their portfolios. tronic trading, Hechert stresses that most recent months of back tests on With demand for more than just a significant amount is still done the its web site in a bid for transparency. end-of-day data, IDC pushed into the old-fashioned way: via the human “We’re giving people the scorecard to business of offering intra-day bond voice. “We think our analysts add value, build confidence. I’m hoping others pricing, but still uses its army of analysts at least for now.” (S051015) Reprinted with permission from the October 17, 2017 online edition of Institutional Investor. © Institutional Investor, LLC. 2017. For more information about reprints and licensing visit http://www.ii-licensing.com. This PDF is authorized for electronic distribution and limited print distribution through November 1, 2018..