Global Bond Trading - Webinar Notes

Overview

Interactive Brokers' bond trading system provides a unique environment for individual traders, financial advisors, institutional traders, brokers and market makers. TWS offers multiple fixed income instruments with electronic access to US and European corporate bonds, US government securities, US Municipal bonds, non-US Sovereign bonds in Asia and Europe, fixed income futures and futures options, all from a single account.

IB connects to bond alternative trading systems (ATSs) in order to provide IB customers with access to multiple sources of liquidity:

  • Tradeweb - an ATS founded by 11 banks that co-own the company, including Bank of America Merrill Lynch, Citigroup, Goldman Sachs and J.P. Morgan. This venue is referred to in IB records as "TRADEWEB" and "BONDDESK". Bonddesk was acquired by Tradeweb in late 2013 but the platforms are supported separately.
  • KCG BondPoint - (formerly known as Knight BondPoint) an ATS that electronically supports buy- and sell-side traders by linking more than 500 financial services firms to 200,000 live and executable bids and offers. Referred to in IB records as "VALUBOND".
  • TMC Bonds - an ATS specializing in corporate and municipal bonds and founded with the backing of Bank of America, Merrill Lynch, Citigroup, Morgan Stanley and Assured Guaranty (formerly Financial Security Assurance). TMC supports buy-side and sell-side counterparties, of which approximately 35% are institutional customers, totaling over 5,000 unique traders and portfolio managers. Referred to in IB records as "MUNICENTR".
  • NYSE Bonds - NYSE operates the largest centralized corporate bond market in the U.S. On NYSE Bonds, orders entered by members or participants are displayed on the limit order book and executed on a strict price/time priority. Referred to in IB records as "NYSE".
  • IB ATS - The IB ATS is an order book matching process designed to cross IB customer orders when the ATS contains the best available price at the time of order routing across all markets to which IB connects. Referred to in IB records as "IBBOND".

Our goal is to provide liquidity to our clients in existing fixed income products and continue to expand our fixed income product offering.



Trading Permissions

To begin trading bonds, first be sure your account has Fixed Income Trading permissions or place a request through Account Management > Trade > Configuration > Trade Permissions Select Bonds

Market Data Subscriptions - select the Bond Data package, with real-time data for US treasury, corporate, and muni bonds. You can also subscribe to Moody's Ratings.

To view Cusip information in your Activity Statements, Trade Confirmation reports and Activity and Trade Confirms Flex Queries, you must subscribe to the CUSIP Service (on Analytic Services tab > Separate Data Services).

Without the Cusip subscription, an IB identifier replaces the Cusip in contract description.



Fixed Income Instruments

US Corporate Bonds

In contrast to traditional bond platforms, IB customers can both see and place bid and offer quotes for US Corporate bonds.

Through Trader Workstation, IB customers can trade corporate bonds at low commissions in nearly 50,000 bond issues. And at the same time, benefit from best execution practices thanks to IB's proven technology and order-routing capabilities.

IB connects to electronic bond trading centers that specialize in quoting prices for corporate debt - giving IB customers access to multiple sources of liquidity. SmartRouted bond orders are submitted to the marketplace displaying the best available price.

You can add a bond to your quote monitor for those issues you are interested in. For Corporate bonds simply type in the ticker symbol and under Corporate Fixed Income select "Bond", which opens a contract Selection window that pulls together all of the debt issuers under the common company name.

Using DUK for Duke Energy as an example, there are several units under the corporation that issue debt. Use the filter boxes on the left of the Bond Selection window to specify the Issuer, Maturity date, Issue date and Bond Coupon. Ctrl+Click lets you make multiple selections.

Or use the US Corporate Bonds Market Scanner to easily access corporate issues and identify specific bonds by any criteria from bond ratings and coupon rate to a specified convexity range or equity cap.

US Municipal Bonds

IB Advanced Market Scanners (TWS build 951 or later) include a US Municipal Bonds scanner that makes it easier to search through the approximately 20,000 muni bond offers that we display in TWS each day.

The municipal bond scanner has many of the standard fixed income filters that you will recognize from the corporate bonds scanner, but in addition we have added a number of filters that are specific to the muni bond market. For example, you can search by state or filter by other muni-specific criteria such as general obligation, revenue bond, band qualified or subject to AMT.

Muni markets tend to only have offer sides, as market makers generally offer out their inventory. When you are looking to sell a muni bond, you can submit an RFQ (Request for Quote). In the RFQ, you specify the amount and whether you are interested in selling or buying. The RFQ will be sent to several bond ATSs where a number of market makers will have the opportunity to price the bond.

Order Confirmation for Muni Bonds:

When placing an order for a Muni bond, the order confirmation window displays a table of comparable bonds - the bond you want to trade will be listed first - with the Ask, Bid and Last trade date fields combined with the Yield which is displayed as "size@price (yield%)".

IB's Best Execution policy is designed to attempt to get two or more quotes for each customer transaction. Because the municipal securities market may be extremely illiquid, two quotes may not be available for a specific security and the currently available quotes may not reflect the best possible price. Therefore IB provides quotes and prices for Comparable Bonds as a comparison to help you determine fair pricing for the bond that you select and make it easier to compare municipal bonds with similar characteristics.

US Treasuries

The on-the-run treasuries are the recently auctioned series from the government. In cash terms the on-the-run issues dominate trading among short-term traders.

You can locate the latest Treasury Bond prices easily done through the Predefined Watchlist in the Mosiac Monitor window.

  • Click the "+" tab and select the US Treasuries (On-the Run) for the recently auctioned series
  • You can copy and paste these Treasuries to any trading screen.

You can also add US Treasuries to any watchlist by typing "US-T" into the Contract field. A contract selection window opens, use the filters in the left panel to narrow the choices and select bond(s) to add to your quote monitor.

Buying and selling US-Treasuries is the same as for any TWS listed security.

Note: Interactive Brokers does not currently support short positions in US treasury securities however active treasury futures and options markets are available on TWS via the CME Group.

For on-the-run US Treasuries, you will see two routing destinations - SMART and BONDLARGE.

BONDLARGE provides institutional-sized trading of On-the-Run US treasury bills and bonds, with a minimum face value of $1mm, and in increments of $1mm.

SMART is the venue where smaller quantities and any off-the-run-bonds can be traded.

Commissions are $5.00 per $1mm face value with no maximum per order. You can see and compare these BONDLARGE to SMART-traded US bills, notes and bonds.

International Bonds

IB offers corporate and sovereign bonds denominated in several currencies. You can trade corporate bonds in TWS denominated in USD, EUR, CAD and GBP currencies.

Over the coming months, the IB Corporate Bond Scanner will be enhanced to make it easier to search for bonds denominated in currencies other than USD and to search for bonds issued by corporations domiciled outside of the US.

We plan to create a sovereign bond scanner to facilitate the search for sovereign bonds. We currently have markets in US Treasuries, and will soon be adding European Government Bonds (EGB's), British Gilts and Canadian Government Bonds. We also plan to add US Agencies, Mexican Bonos and Japanese Government Bonds.

Advanced Market Scanners

TWS Advanced Market Scanners allow you to search the vast inventory for bonds with comparable attributes including a particular maturity range, certain coupon rate, or by industry. You can use the Filter fields to create a customizable search for either Corporate or Municipal bonds with the highest yield, best ratings or whatever bond criteria you select.

Advanced Market Scanners can be found on the Classic TWS Analytical Tools menu or from the Mosaic layout use the New Button drop down to open the Advanced scanning tool.

Start by choosing US Corporate Bond as the instrument to drive the filtering selections available, and include the parameters that are specific to your needs.

Filters

If you know the issuer's name and how far in the future the bond that you are seeking to purchase matures, you can use the scanner to locate a selection of bonds that may meet your criteria. You can also use the maturity and ratings fields to filter across all available bonds in order to generate potentially suitable candidates for your portfolio.

  • Specify optional market data filters such as quantity available, price, current yield and yield-to-worst.
  • When searching for specific corporate debt issues, the default search will include all debt issuers. Or you can choose to filter with the two fields at the bottom of the Market Data section:
    • Stock Symbol - for bonds issued by the Company with the specified stock symbol
    • Issuer field - returns a list of all debt issues which contain the name entered.
  • Choose Sort By from the drop down list on the Search bar to select how the results will display.

You can create a custom scan that you check each day by simply leaving the defined Bond scanner tab open. With Auto Refresh checked, an updated list of bonds matching your criteria will be populated; unchecked displays the most recent scan that was run.

Save your scan parameters as a template to reuse anytime you open the Market Scanner window by clicking the disk icon next to the Max Results field.

Customize Advanced Scanner Layout

Additional relevant bond columns can be added to the Market Scanner. Use the Global Configuration wrench and expand the Bond category to see all available fields specific to bonds.

Once configured, your choices will be retained if you leave the Scanner tab open, or you can save the scanner criteria as a template to reuse anytime you open the Market Scanner window by clicking the disk icon next to the Max Results field.

Trading Bonds

Market Center Details

Unlike other trading products with standardized market structures, bond trading is decentralized. Bond quotes are not firm and order minimums can vary. Some bond quotes may have a minimum size requirement on specific venues that may not be displayed, which may preclude your order from being executed, therefore, Bond orders must be Smart Routed. Direct routing of bond orders is not currently supported.

Note: Due to the manual nature of certain bond market destinations,orders may take up to five minutes to become executable.

Each of the away platforms has their own fee schedule for trades matched on their system. Fees vary depending on the platform, type of bond and the quoted size. Some platforms do not charge the liquidity "maker" side of the trade but do charge the "taker" side of the trade while other platforms charge both the maker and the taker.

Fees charged by away platforms can have a significant impact on the net price of the trade. Since these fees can vary significantly, you can choose to view the bond quotes as "net" prices, adjusted to reflect the platform fees for the type of bond and the quoted size (excluding IB's commission).

You can enable your choice in Global Configuration > Display > Ticker Row under Fixed Income Pricing you can select either Show Net Price or Show Raw Price.

You choice of the "net" or "raw" mode setting will apply to all prices shown including those on the market data and order rows of the Trading window, the Market Depth window and Trades log.

You can view the away platform fees (if any) using the "net" price. Purchasing a bond for the same quoted raw price on two different away platforms can result in two different net prices when including their platform fees.

When IB displays the net price [(S+) indicates Net price] for bonds (which includes exchange or platform fees), each quote from away platforms is calculated with the assumption that the trade will be executed in full.

(R) Indicates that raw prices are shown (which does not include exchange or platform fees). It is important to remember that with the platform fee and minimum size requirements, the displayed net bid or ask prices may only be achieved by trading the full size, as fees may vary depending on the trade size.

RFQ

You can submit a Request for Quote on a bond that has no displayed quote, or to potentially improve an existing quote, or get a quote based on a specific trade size.

Right click on a bond in the scanner results to send an RFQ (Request for Quote).

Market Depth Display

The Market Depth Trader window for bonds will show all bond prices as either net or raw. When you select a bond, all available bid and ask price levels with their aggregate quoted sizes are displayed. In addition, when in the Net price mode, this window shows the minimum trade sizes specified by the order originators at a given price and side.

Below is a sample of Market Depth Trader window in raw mode showing a composite display of the best bid and offer from the IB book as well as each of the away platforms.

When you have the net mode selected, an additional field is visible to enter a Quantity at which you would like to see the net prices calculated. This allows you to view market data in net price terms with the size that you want to trade, which can help you compare execution costs.

Bond trades executed through the IB system are subject to away platform fees, when applicable, as well as IB's commission.

Bond Search

The external Bond Search tool is an advanced query tool that allows you to search for bonds using specific filter criteria based on two different queries: the OAS (Option-Adjusted Spread) and YTW (Yield to the Worst). Results display in a separate Bond Details table which can be exported to the Risk Navigator and opened as a what-if portfolio for further risk analysis.

Firefox is the preferred browser to view all the Bond Search features and should be set as your default browser. The Bond Search tool opens in a separate browser window, but utilizes TWS authentication, so it can only be opened through TWS.

The Bond Search tool is available from the Classic TWS, Analytical Tools Menu - If not visible, use the arrowhead to expand the menu. This feature differs from the Market Scanners in that it provides risk measures and bond metrics.

The Bond Search tool has 3 parts - Query, Scatter Plot, and Bond Details.

Interactive Brokers does not currently support short positions in US treasury securities. For anyone wanting to take an equivalent short treasury position, active treasury futures and options markets are available on TWS via the CME Group (ECBOT).

Query Fields

Use these fields to define bond search criteria (similar to scanners). Specify a range for bonds in categories such as Open Amount, Coupon Rate, Maturity range, and Issue Date Range. The more information you specify will narrow the request to a reasonable number. Choose the query type:

  • Option-Adjusted Spread - to evaluate bond prices. The scatter plot can be toggled between Time to Maturity (in years) and Duration (price sensitivity to interest rate movements).
  • Yield to the Worst - lowest potential yield on a bond is calculated on all possible call dates. The higher the YTW - the more risk.

The Search Button updates with the number of bonds that will match your query results. Once your filters are defined, click Search the button to add results to the scatter plot.

Scatter Plot

Click on a green dot to add individual bond(s) to the Bond Details. Dot becomes blue to indicate it is included in the Bond details section below. You can click on the red minus icon to remove individual bond(s) from the Bond Details table.

To Select/Remove multiple bonds:

  • Hold the Shift key and drag in the scatter plot - a blue rectangle indicates the selected bonds are added to the Bond details screen select multiple bonds and select control button red rectangle let's you remove those bonds from the table.
  • Hold the Control key and drag in the scatter plot - a red rectangle indicated the selected bonds will be removed from the Bond Details.
Bond Details

Evaluate bond details based on the risk measures displayed. Add or remove columns in the table and reset units/decimals for scaling using the buttons in the table. You can eliminate individual bonds with the red minus icon on the table.

Export to a "What-If" scenario:

From the Bond Details section, you can export your selections to a "What-If" scenario in the Risk Navigator with the button provided beneath the Bond Details spreadsheet.

  • Open the What-if portfolio in Risk Navigator from the Portfolio menu, choose Open and navigate to where you saved the file
  • Go to the Bond tab, where the selected bonds will be separated by ticker symbol then by debt issuer. Use the Plus to expand for individual bonds.

When ready to trade the bonds:

  • Select at least one bond in the trade column to activate the Trade button in upper right corner.
  • The order row is created in the Classic TWS Pending tab where you can edit order fields then Transmit
  • Select any of the bonds and Copy (Ctrl+C) then Paste (Ctrl+V) into a blank row on any Quote Monitor.