When it comes to trade reporting in equities the current debate centers on whether certain high speed trading firms have microsecond advantages over other market participants because they purchase trade report feeds directly from exchanges rather than waiting for the slower, consolidated feed from the SIP (Securities Information Processor). No one debates the accuracy of the reported trades (though they may debate the order), just the speed. The accuracy is taken for granted because there are a number of processes in place to ensure the accuracy. Exchanges have clearly erroneous trade review procedures that remove obvious outliers within minutes of their occurrence. There is also a connection between reported trades and trade settlement such that if a trade is reported wrong, one of the two sides will have a strong economic incentive to ensure the trade report is corrected.
By comparison, trade reporting for fixed income securities seems almost quaint. Without the full automation possible with exchange trading, participants have up to fifteen minutes to report their trades. And with one exception (dealer to dealer trades in corporate bonds) there is no connection between trade reports and trade settlement. This leads to some fun outcomes when reviewing the trade tape for bonds. At BondWave, we have developed a series of products that rely on accurate and timely trade reports. Therefore, we have developed a number of techniques for analyzing the tape and filtering out what we believe to be clearly erroneous trade reports.
The errors appear to fall into a number of broad categories. The easiest to find are price transpositions (typing in 102 rather than 120) and incorrect side of trade (buys that are clearly sells and vice versa). The less obvious situations are those that appear to be trade throughs. A trade through occurs when a buy occurs at a higher price than the existing best offer and a sell occurs at a price less than the existing best bid. This is a complex and detailed topic that I will save for a later note.
Today and in coming notes we will look at some of the more obvious errors.
Paul Daley is a Managing Director in BondWaves Information Lab