r r

I r

l l L

The Role of Truth in Liar's Poker

- Ted Kellogg, Keystone Investment Management Company.

As a dealer market, the trading of fixed income securities is profoundly different from current equity trading. Since each dealer is separately quoting prices for a different inventory of instruments, it is nearly impossible for investors to "comparison shop" across bond dealers, as is automatically done in the centralized trading schemes for equities.

In recent years, several entities such as Bloomberg Financial and the Electronic Joint Venture (EJV) have attempted to bring fixed income price quotations to investors through electronic terminals. These efforts have met with mixed success. There is also some question as to the real motivation of such systems to disclose information fully, since Bloomberg Financial is partly owned by Merrill Lynch and the EJV is a consortium of four other major brokerage firms, all of whom are large-scale bond dealers. They all stand to lose their informational advantage over their customers when full electronic quote dissemination comes to the fixed income markets.

It was also pointed out that much of the information and research put forth by bond dealers often ought not be taken at face value. For example, today's complex fixed income instruments such as put bonds and CMO's have so many interwoven contingent claims that traditional assumptions, such as prices increase as yields decrease, become suspect. Often price and yield calculations are based on a variety of assumptions which influence the expectations for contingent claims and hence the price/yield relationship.

Despite the difficulties ahead, greater disclosure of fixed income quotations is inevitable and will lead to better price discovery and more efficient markets in the future.

r r r r [

[

I I {

The Role of Truth in Liar1 s Poker

. .

Fixed lncome .. Systems for the l 990's NIS Conference March 1992

l The Role of Truth in Liar's Poker l l 12 Opening Hand - Pair of 8's, Pair of 7's

l l L L L L

,o .. AUO(S ...,.

' 0 028874720

A028874720 · · ,

-

w,..,ru, ,o ro>

m Three 8's in Hand - Bid "Four 8's"

A02887468 □

iii(

m Three 8's, Pair of 2's and Pair of l's in Hand Bid?

A 83181348 C

flI1

What a Difference a Day Makes

m Consecutive Wall Street Journal Leads:

I Bond-Pri~~~ ::: Fall Sharply: On Report Data Showing Jump In Industrial Activity

/ Spur Inflation Fears

,Bond:.Gloom IsSt~rting TqClearUp Yields on Top Issues :

I . Off er Large Returns Above Inflation Rate

I

r r r r r

f

(

l

I

L L L L L

How a Change in Yield Affects Price

m By the Book Va lue

------ -- " Po "'

"'

...... -- --- -Ac tual

Yo Term Structure

------ Shift -------

11 A Dynamic Model

Price

Yield

Source Barra

Representative Spreads ...

111 Are these in inventory? I ■ ■ Glad you ·asked .Spraads,.fo(:Selecte_o borporates/;;' · 1

r

r

f

What's This Little Item?

• Actual Size::

The aoatysls In ttws repon Is acct.lf8!e lo the bes! ol our knowledQ• and Is besed on lnlorme.tion Iha( we constde< to be reliable. Alf oplnk>os and conduslons In 1hb ~~ren.ct our Judomoot as ol lhls date end are subject~ ~- AJI ana/'yses aro based on c.rtaln as.sumpOons noted hef~n and different assumptions cxxAd ywtld sobftan • tiefly dlff«ent r8$Ulls. You are caUlioned thal 1he

Fixed Income Trading Screen of the Future?

03/03 MCIC MCI COMMUNICATIONS LasU,Q 100 33/6- Unchanged

Interests- 99 Present-6 O&Q 34/0 H&Q 34/0 Age . . .... Bid .1 .. Ask . 3 .. Size Buy .. •.••. .••..••..•. 34 Q 33/6' 33 / 7' 10:-:10 33a11 1,000 H+ E 33 /5 33 / 7 OxOl 33 / 4 1;000 34 TSCO 33/6' 34/1 10x 10 33a7= 3,000 H+ PWJC 33/3 33/7' 10x 10 30/0= 3,000 H+ JEFF 33/3 33 / 7' 10x10 33a13 3,100 A 51 GSCO 33/ 4 33 /7' 10x10 33a 13 1,000 X 49 MOTC 33/5 34 /0 10x1 0 33a13 26,000 A 49 PRUB 33 / 5 34 / 0 10x 10 33 /6 1,000 X 29 LEHM 33/5 34 / 0 10x10 33 / 5 5,000 X

11 :42 11 :39 11 :38 11 :22 11 : 19 11: 19

L&Q 33/~ V 1,085,800 Sell .. , .... ....... USO 33a13 500 34/2 500 33/5 33/5 33/5= 33a9 33a9 33a9 33a7 33/4

43 , 600 A 1 1 : 15 10,000 A 11:11 9,000 T 11:09 9,000 A 10:59 3,400 X 10 : 42 5,000 T 10:38 7,000 A 10 :07 4 ,000 X 09:49 H+ MADF :J3 /5 3 4 / 1 10::101 33a9 5,000 X

12: 07 OJI ].788.69 + 13 . 42 V&N 99.6m (120.71 TIC +259 (cl INSTINET

Source: lnstine1