MarketAxess Holdings Inc. (Nasdaq: MKTX), the operator of a leading electronic trading platform for U.S. and European high-grade corporate bonds, emerging markets bonds and other types of fixed-income securities, today announced the introduction of
IQ™: Reducing Execution Costs, a new proprietary approach to analyzing trading costs in the fixed-income markets that has been developed by MarketAxess Research.
In highly liquid markets such as equities, a number of sophisticated approaches are widely accepted to measure the main components of trading costs – known as transaction cost analysis (TCA) – and thereby help support customers’ best execution requirements.
IQ is the first formal methodology for measuring transaction costs in the less liquid corporate bond markets.
Separately, new independent academic research from the University of California, Berkeley, shows that there are material reductions in trading costs for users of electronic trading tools that source liquidity from a greater number of counterparties*.
MarketAxess Research looked at the embedded costs of trading, consisting of the dealer mark-up plus any fee associated with executing the trade. It was therefore possible to determine the cost of execution by comparing the electronically executed trade to a ‘prevailing market price’ using corporate bond market data from FINRA’s TRACE.
For its initial analysis, MarketAxess took a sample of 900,000 TRACE-reported trades over a 24-month period from January 2009 through December 2010. From these, MarketAxess identified 150,000 trades for which it could establish a prevailing market price and for which it was able to compare electronic trades with a sufficient number of TRACE prints.
MarketAxess’ research demonstrated the statistically and economically significant cost savings afforded to the end user by electronic trading across all trade size buckets and maturities in the fixed-income credit markets. MarketAxess was able to estimate, at a 95% confidence level, that the average cost savings of electronic execution for all trades during the period analyzed was 5.2 bps, compared to the calculated Volume Weighted Average Spread (VWAS).