Academics Edith Hotchkiss of Boston College and Michael Goldstein and Erik Sirri of Babson College were asked by the NASD to study the impact of additional transparency under TRACE on liquidity in the BBB corporate bond market.
The study employed a methodology for measuring transactions costs, which required a benchmark against which to compare prices of illiquid bonds. Reuters DataScopeâs evaluated fixed income prices, used in the absence of trades, closely tracked the TRACE reported transaction prices in subsequent trading activity.
Edith Hotchkiss, Associate Professor of Finance at Boston College, said: "We conducted a study on the effect of transparency on liquidity of BBB bonds. It is difficult when dealing with bonds that donât trade actively to measure trading costs. We needed a benchmark price to in order to measure TRACE prices relative to a daily bid price. Reuters evaluated fixed income prices were the best out there, and tracked the transaction prices reported to TRACE very well."
Kevin Bradshaw, global head of Enterprise Information at Reuters said: "We are excited by the study and the high correlation of our US bond evaluations to those of actual TRACE transaction prices. It validates our efforts in the fixed income arena - creating the highest quality, most timely and accurate fixed income evaluations globally."
The NASD introduced TRACE in July 2002 in an effort to increase price transparency in the U.S. corporate debt market. Increasingly financial institutions use this reportable pricing as active benchmarks for corporate bond evaluations. However mutual funds and many firms who strike NAVâs or need independent evaluations require daily evaluations.
Reuters has built a team of evaluation experts within Reuters Pricing Service to address just such challenges and their accuracy is unparalleled.
The academics at Babson and Boston Colleges found that the Reuters evaluated prices worked so well that they are using them in other ongoing studies of other parts of the market including the market for on high yield bonds, said Hotchkiss. The results of their study of the high yield market should be made public later in November.
This further supports Reuters DataScopeâs commitment and investment in the fixed income evaluations area. Financial institutions are turning to evaluated pricing to provide unbiased and independent price transparency as the fixed income market grows in complexity and is under an increasingly stringent regulatory environment.
Global evaluated fixed income pricing is becoming increasingly accepted as an essential price source, according to a survey commissioned by Reuters and designed and conducted by A-Team, a leading research and analysis company focusing on the use of information technology in financial markets.