Without knowing the ins and outs of the NBBO, I was a former CB salesman in London and Hong Kong and there are lots of cases where you don't want to deal with 100k orders. Minimum size that you actually want to deal with is a mill, and depending on the issue potentially more than that.
You might deal with a 100k order if you're axed that way or at least have a position, but if you're axed the other way or are just market making and don't have a position then it's more pain than it's worth to do the trade.
For example if I don't have a position and as a result of filling your purchase I'm short 100k of bonds, I now either have to buy 100k of bonds which is a pain because everyone else only wants to deal in 1 mill lots so I likely have to call in a minor favour and get someone else to sell me 100k or buy a mill and end up 900k long which I don't really want to do, or I could try and get a borrow for 100k which again is a pain and I now have a position on which is absolutely pointless but is still a pain.
The main problem is that bonds simply aren't liquid in the same way that stocks are. They often don't trade much at all (it's quite common for bonds not to trade at all on any particular day) and they don't trade in small size lots because the market is very much dominated by instos.
This is very helpful and sounds similar to back in the day when I market made LQD. We would need to accumulate a big position to make hedging cost effective so we mostly just didn't hedge. We would just trade for edge and let the balance sheet absorb the risk. I'm surprised the TIPs MM doesn't see it that way. If mid market is fair value why not just collect the edge and where the risk. When the position size accumulates then hedge.
If you are trading small lots you are trading against random order flow so there's no bias to the p/l and over time it converges to your expectancy
Oct 22, 2023·edited Oct 22, 2023Liked by Kris Abdelmessih
Mabon Nugent used to have an entire desk of IBM 3270 terminal guys that would do exactly what you suggested (warehousing odd lots until you had collected enough to make them round lots) with corporate bonds. In the bond room at the New York stock exchange. They referred to the odd lots as "baby bonds". (Although, technically, baby bonds refer to bonds whose stated par value is less than $1,000)
Nowadays two alumni of Mabon Nugent have two separate desks at two separate firms ( I&S ... And Brownstown) that takes similar odd lots from regional Banks and regional brokerages and packages them up into round lots (munis and corporates, I don't think they do it for treasuries)
By the way 3 guys left Mabon Nugent to form a different kind of venture.
P-eter, R-ichie, and E-ddie, left Mabon...to form PREbon. I hear they did okay.
Without knowing how it works with TIPS specifically, corporate bonds don't have designated market makers and I would not be surprised if government bonds didn't either. If it is the case that there is no MM, as a desk you don't want that 100k order because it's just one more thing that you have to do that hasn't provided you any benefit. And it may well be that if you do take the trade that you never build on or get rid of that position without actively trying to, as I said there are a lot of bonds that don't trade a lot or if they do it's in insto size rather than retail, so now you can't get out of that tiny annoying position easily.
It's much better to just say my minimum size is a mill and not have to deal with the odd lots.
As an FYI, Blackrock just launched term tips ETFs. It’s part of their iBond suite. Let’s you get exposure to TIPs at different points on the curve. 2024 ticker is IBIA.
You just tell Treasury that you're willing to accept wherever the auction clears, maximum size is $10 million par. The treasury will take the money directly out of your bank account or brokerage account, and you can tell the treasury to deposit the bonds in your brokerage account, or let treasury.gov keep custody. (N.B. do not confuse these with US savings bonds (which are also available at treasury.gov) . These are real treasuries. )
Never tried to buy tips on treasury.gov, but I imagine they are available to the public to be sold at every tips auction.
Hi, Kris. Does IB not allow you to view the “depth of book”? On other broker’s platforms you must click “depth of book” which will display all offers for the specific bond. The top of book offer (which displays by default) will have the lowest offer price—but usually a high minimum quantity. You can then drill down to view offers with lower minimum quantity—but higher offer prices.
In general, liquidity for TIPS is much less than for nominals.
So as far as I can tell with buying bonds through IB, the bid/ask is tied to a specific minimum size. If you are below it, there's no obligation for them to trade with you. The problem is that IB doesn't tell you the min size and so it just doesn't trade and sometimes may even trade through your limit price. Not sure if I'm 100% correct, but this is how someone explained it to me. I can always call IB to find out for sure, but then I will have to call IB, no thanks!
Without knowing the ins and outs of the NBBO, I was a former CB salesman in London and Hong Kong and there are lots of cases where you don't want to deal with 100k orders. Minimum size that you actually want to deal with is a mill, and depending on the issue potentially more than that.
You might deal with a 100k order if you're axed that way or at least have a position, but if you're axed the other way or are just market making and don't have a position then it's more pain than it's worth to do the trade.
For example if I don't have a position and as a result of filling your purchase I'm short 100k of bonds, I now either have to buy 100k of bonds which is a pain because everyone else only wants to deal in 1 mill lots so I likely have to call in a minor favour and get someone else to sell me 100k or buy a mill and end up 900k long which I don't really want to do, or I could try and get a borrow for 100k which again is a pain and I now have a position on which is absolutely pointless but is still a pain.
The main problem is that bonds simply aren't liquid in the same way that stocks are. They often don't trade much at all (it's quite common for bonds not to trade at all on any particular day) and they don't trade in small size lots because the market is very much dominated by instos.
Hopefully that explains some of the issues!
This is very helpful and sounds similar to back in the day when I market made LQD. We would need to accumulate a big position to make hedging cost effective so we mostly just didn't hedge. We would just trade for edge and let the balance sheet absorb the risk. I'm surprised the TIPs MM doesn't see it that way. If mid market is fair value why not just collect the edge and where the risk. When the position size accumulates then hedge.
If you are trading small lots you are trading against random order flow so there's no bias to the p/l and over time it converges to your expectancy
Mabon Nugent used to have an entire desk of IBM 3270 terminal guys that would do exactly what you suggested (warehousing odd lots until you had collected enough to make them round lots) with corporate bonds. In the bond room at the New York stock exchange. They referred to the odd lots as "baby bonds". (Although, technically, baby bonds refer to bonds whose stated par value is less than $1,000)
Nowadays two alumni of Mabon Nugent have two separate desks at two separate firms ( I&S ... And Brownstown) that takes similar odd lots from regional Banks and regional brokerages and packages them up into round lots (munis and corporates, I don't think they do it for treasuries)
By the way 3 guys left Mabon Nugent to form a different kind of venture.
P-eter, R-ichie, and E-ddie, left Mabon...to form PREbon. I hear they did okay.
Without knowing how it works with TIPS specifically, corporate bonds don't have designated market makers and I would not be surprised if government bonds didn't either. If it is the case that there is no MM, as a desk you don't want that 100k order because it's just one more thing that you have to do that hasn't provided you any benefit. And it may well be that if you do take the trade that you never build on or get rid of that position without actively trying to, as I said there are a lot of bonds that don't trade a lot or if they do it's in insto size rather than retail, so now you can't get out of that tiny annoying position easily.
It's much better to just say my minimum size is a mill and not have to deal with the odd lots.
As an FYI, Blackrock just launched term tips ETFs. It’s part of their iBond suite. Let’s you get exposure to TIPs at different points on the curve. 2024 ticker is IBIA.
Welcome to the bond market, where price discrimination by size has always been the order of the day
I buy my treasuries at treasury.gov.
You just tell Treasury that you're willing to accept wherever the auction clears, maximum size is $10 million par. The treasury will take the money directly out of your bank account or brokerage account, and you can tell the treasury to deposit the bonds in your brokerage account, or let treasury.gov keep custody. (N.B. do not confuse these with US savings bonds (which are also available at treasury.gov) . These are real treasuries. )
Never tried to buy tips on treasury.gov, but I imagine they are available to the public to be sold at every tips auction.
Hi, Kris. Does IB not allow you to view the “depth of book”? On other broker’s platforms you must click “depth of book” which will display all offers for the specific bond. The top of book offer (which displays by default) will have the lowest offer price—but usually a high minimum quantity. You can then drill down to view offers with lower minimum quantity—but higher offer prices.
In general, liquidity for TIPS is much less than for nominals.
I will check again but I didn't happen on a depth. I'll look for it explicitly
RE: "did not need to be honored for less than the displayed size." ... uh ... what?
"Mr. Abdelmessih, this table is not for you. You should be playing over there ... not here."
Was there something in the Terms and Conditions? I doubt it.
So as far as I can tell with buying bonds through IB, the bid/ask is tied to a specific minimum size. If you are below it, there's no obligation for them to trade with you. The problem is that IB doesn't tell you the min size and so it just doesn't trade and sometimes may even trade through your limit price. Not sure if I'm 100% correct, but this is how someone explained it to me. I can always call IB to find out for sure, but then I will have to call IB, no thanks!