David Krein

Head of Research

New Sector and Specialty Bid-Ask Spread Indexes (BASI)™ reveal different trading costs for different market segments

With the ongoing market-wide focus on liquidity, we’re launching 8 new BASI indexes today. Collectively called the Sector BASI and Specialty BASI, they’re designed to help investors more thoroughly understand their potential trading opportunities and costs.

The 4 new Sector BASIs capture the top four most active U.S. high-grade corporate bond sectors according to BondTicker™ and TRACE. The 4 new Specialty BASIs capture critical institutional credit market segments. In fact, these new indexes confirm our thesis that different segments of the U.S. high-grade market have different trading costs.

Sector BASI and Specialty BASI Methodology

The methodology begins with a daily subset of the U.S. high-grade corporate bond universe as defined by BondTicker and TRACE, and excludes any security that is not a corporate bond. The volume weighted average spread is calculated on both the bid and offer side for each security, and the difference results in the daily bid-ask spread at the bond level. A subset of eligible securities is then identified to create each Specialty and Sector BASI based on their respective attribute requirements. An average bid-ask spread among qualified bonds provides the daily score, and a 20-day moving average of scores represents the final, published index level.

Sector BASI

These are the 4 new Sector BASIs launching today.

  • MarketAxess HG TRACE Healthcare-Pharmaceuticals BASI
  • MarketAxess HG TRACE Banks/Finance BASI
  • MarketAxess HG TRACE TMT BASI
  • MarketAxess HG TRACE Oil-Gas-Exploration BASI

Taken together, these sectors represent 70% of HG TRACE activity so far this year.

Sector Market Share
Banks/Finance 34%
TMT 16%
Oil-Gas-Exploration-Energy 10%
Healthcare-Pharmaceuticals 10%

Chart: Sector BASI
Click to Enlarge

Specialty BASI

These are the 4 new Specialty BASIs launching today.

  • MarketAxess HG TRACE Large Issue BASI – includes bonds with $1 billion or more outstanding
  • MarketAxess HG TRACE Liquid BASI – includes bonds with multiple buys and sells on the same day
  • MarketAxess HG TRACE Long Bond BASI – includes bonds with 10 years or more to maturity
  • MarketAxess HG TRACE New Issue BASI – includes bonds with 90 days or less since issuance

Taken together, these segments represent a significant fraction of HG TRACE activity so far in 2015.

Index Market Share
Long Bond 28%
Large Issue 57%
Liquid 27%
New Issue 23%

Chart: Specialty BASI
Click to Enlarge

How many bonds are qualified for BASI?

When we launched our revamped Market Insights in October, we included a chart on TRACE Crossable Activity (see below) which tracks whether a bond has at least one client buy and one client sell on the same day for U.S. high-grade (HG) and high-yield (HY) debt. Crossable activity simply suggests two-way client trading. The term “crossable” is a carefully chosen term since we cannot say with certainty that the two-way activity was crossed, even though TRACE also tells us the specific trade sizes and times.

Chart: TRACE Crossable Activity
Click to Enlarge

The chart above shows that current level of crossable activity in HG is 43%. This means that 43% of HG CUSIPs have at least one client buy and one client sell on a given trading day, which is in the middle of its historic range. While the proportion has certainly been lower, touching 40% several times over the last 36 months, it’s been as high as 50% in the post-financial crisis environment of 2009. These are the bonds that generally provide the starting point for the Sector and Specialty BASI.

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