THE introduction of a market making system in Irish Government bonds one and a half years ago has been a qualified success, according to a detailed survey by the Irish Association of Investment Managers. The survey also shows that Davy and NCB have the highest rating of the four domestic marketmakers.
When it comes to pricing Government bonds, investors were asked to rate the various market-makers on a 1 to 10 basis. Davy and NCB received the best overall ratings, with Davy edging marginally ahead of NCB with a rating of 7.68 against NCB's 7.54.
Riada received a rating of 7.00 while Goodbody since subsumed into AIB Capital Market - came out bottom of the four Irish market makers with a rating of 6.30. The two overseas market makers barely registered with investors, with UBS getting a rating of 4.7, while CSFB got 1.7 from the 28 per cent of respondents who even bothered to mention CSFB.
But among the 38 respondents there was a noticeable difference in their estimation of the two leading market makers. Irish fund managers, who make up the membership of the IAIM, gave Davy the highest overall rating, while overseas investors and the Irish banks gave NCB their top rating.
When it comes to ability to deal in size, the IAIM survey does not give a breakdown between the various market makers, but treated them as a group. Again using the 1 to 10 rating system, it is clear that investors believe that the market makers are adequate when it comes to dealing in relatively small deals and not particularly good for dealings in very large lots of the benchmark stocks.
On the reliability of the prices displayed on their screens by the marketmakers, Riada comes out on top with a 7.15 rating, followed by Davy with 6.83, NCB with 6.78, while Goodbody came a poor fourth with a 5.69 rating. Again, the overseas market makers fared poorly, with UBS given a rating of 4.11 and CSFB 2.8.
Fund managers said that this apparent inability to deal at the prices they displayed on their screens was no great reflection on the marketmakers.
Significantly, only 5 per cent of the investors surveyed felt that the marketmakers fulfilled their minimum requirements to provide two way prices for a minimum amount of each of the benchmark stocks. About 59 per cent felt that they fulfilled their obligations most of the time.
The National Treasury Management Agency (NTMA) came in for some criticism from the investors with 13 investors - over one third of the total - feeling that the agency handles market sensitive information "badly", while 14 of the respondents felt that the NTMA handled this sort of price sensitive "adequately". Only to of the 38 respondents felt that the NTMA handled market sensitive information "well" or "very well".
The market makers themselves came in for some strong criticism with only one in four of the investors surveyed believing that the "Chinese Walls" between the market makers and companies associated to them are effective. The majority - 60 per cent - felt that the "Chinese Walls" were fairly effective. And over two thirds of those surveyed felt that market makers should be in a different physical location from any other companies which they are associated with.
The IAIM survey got a response rate of 75 per cent and of the 38 responses, 17 came from IAIM members, 12 from banks, four from building societies and six from overseas investors. The survey shows that 55 per cent of the respondents believe that the liquidity in the Irish bond market has improved significantly as a result of market making, with no investors stating that liquidity had deteriorated.
Most of the fund managers which make up the IAIM membership believe that liquidity has improved, half of the banks surveyed had similar views but, significantly, only one of the four building societies felt that liquidity had improved.
The results of the IAIM survey broadly reflect the survey the association did last February on commissions paid to stock brokers and market makers. Those who emerged as the biggest commission earners such as Davy and NCB were also the highest rated in the IAIM survey.
Based on commissions paid to IAIM members alone, Davy has 26 per cent of the Irish bond market, with NCB on 23 per cent, Riada on 20 per cent and Goodbody on 18 per cent. These commission figures do not include commission paid by overseas investors in Irish bonds.
The market making survey also emphasises the concerns about the apparent lack of impact made by the two overseas market makers, particularly the Swiss American CSFB group. It is understood that the NTMA has on several occasions made its dissatisfaction clear to CSFB and could conceivably revoke its market making licence.
UBS may not have emerged from the market making survey with a particularly high rating, but it does enjoy a 5 per cent share of the market a reasonably creditable performance.
