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A price is a price is a price. At least it is for a stock, but not necessarily for a bond.
Whether you subscribe to an expensive Bloomberg terminal or have bookmarked your favorite stocks on a cellphone app, you can quickly pull up this afternoon’s closing price for AAPL or GE. Historical price data that stretches back years or even decades also can be displayed in an instant.
This is possible because equity price data are conveniently centralized in one or two primary exchanges per market, making thousands of tickers available to all interested parties. The information flows at warp speed to all ends of the investment spectrum.
Clearly, the availability of current and historical data is important, but its breadth, depth and validity are also critical factors. After all, equity price data are official, objective and universal. Equity price data are democratized.
Investors are empowered to research a market, develop an investment thesis, tailor the approach, backtest the strategy and monitor the positions going forward. These same characteristics largely explain why equity indexes represent the bulk of what index providers offer. Not only is indexing more established in the equity world, but the providers can simply spread the data feed overhead across more and more stock indexes.
It is a completely different story in the bond world, where there are no exchanges, pricing transparency or objectivity, or meaningful data availability.
Long ago, bond price data existed only in the large investment banks that had the capital and technology to make markets in such instruments. Even then, each bank assembled prices expressly for securities in markets that it participated in regularly. Further, all trading was done over the counter by traders who knew each other and with institutions that maintained a regular book of business.
Bond investors sometimes had to call two, three or more dealers to find someone with the right mix of inventory and interest to get a price. Even then, it was only one price and nearly impossible to determine whether it was competitive. If you had an obligation to get three prices before transacting, well, that was a lot of dialing, and prices would often fluctuate in the interim.
This approach applied for all but the most liquid bond markets (and, more specifically, the most liquid bonds within the most liquid bond markets). Focused on munis? Interested in automotive corporates? Looking for high-quality sovereigns? There are dozens of markets, and each had dozens, hundreds or even thousands of issuers. The total number of bonds was (and still is) orders of magnitude greater than the number of stocks.
From an indexing perspective, this has long been an extremely difficult hill to climb. Simply navigating the logistics of collecting and organizing the necessary data from so many parties—and for so many instruments—was a Herculean task. As a result, indexed offerings in the fixed-income markets remained far behind those in the equity markets.
Moreover, rather than make the current and transaction-based data available for lower-revenue indexing activity, the banks preferred to keep it private and leverage it for their own higher-revenue bond-trading activity. (One notable exception here is Lehman Brothers, which used its namesake indexing business to bolster its bond-trading platform. Lehman, of course, has since been absorbed into other large financial companies, with the bulk of its operations and indexing business now part of Barclays Capital.)
Over time, banks got smarter and faster in pricing a wider array of bonds and aggregating the historical data. In addition, interdealer bond brokers and data vendors have expanded their presence in the real-time bond-price business, helping to disintermediate the banks.
As a result, the times, they are a-changin’ for the indexers. Bond-price data is now far easier to obtain. Clean, timely and accurate data can be had from multiple independent sources, even for narrowly defined markets with less investor interest.
The infrastructure and technology required to build and maintain bond indexes has also improved dramatically, and can be readily matched with other metrics such as fundamentals or liquidity. Offerings can now move beyond the plain vanilla (U.S. investment-grade corporate bonds, for example) toward indexes that take real-world investment demands into account, such as nondollar and emerging markets bonds.
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2012
