Taking the Measure of Effective Spreads in the U.S. Credit Market
Cost control and risk management are constant challenges for investors in the corporate bond market, and reliable cost estimates are difficult to come by. As asset managers raise their expectations for best execution across asset classes, bond investors in particular need a realistic, effective pre-trade tool to help them gauge the likely effective spread cost of their trades. Fixed income execution costs are dependent on multiple, potentially nonlinear variables, so ITG has applied modern machine-learning methods to identify hidden relationships and patterns. ITG’s model shows that larger orders are less sensitive to trading volume and volatility, but that these “equity-type” characteristics explain a considerable variation in effective spread predictions as bond characteristics change. ITG’s model shows that “equity-type” TCA factors (quoted spread, volatility and trading volume) explain a considerable variation in effective spread predictions as bond and trade characteristics change.
Whether you’re trading stocks, bonds* or currency pairs, ITG can help you measure transaction costs and improve trading performance. Contact your sales representative to learn more about our multi-asset TCA.
*Fixed income TCA will be available summer 2017
Milan BorkovecContributors Managing Director, Head of Financial Engineering
Milan Borkovec joined ITG’s Financial Engineering department in 2001 as research analyst and since 2006 has headed the department. Mr. Borkovec holds a PhD from the Munich University of Technology and taught at Cornell where he originated new research in credit risk modeling and pricing of derivatives, heavy-data traffic modeling as well as asymptotic theory of sample autocovariance and autocorrelation functions of financial time series.