Primary bond market:
Direct contacts, clear rules, fair prices
Sellers and buyers in direct dialog and correct pricing with a closed auction - with a spread range based on the bid-ask curve of the secondary market: This is what Valyo now offers for the first time for the primary market of bonds. The innovative concept relegates intermediation, which has been common practice up to now, to mothballs. This will please issuers and investors because it gives them a price that accurately reflects supply and demand.
In the secondary bond market, pricing takes place on exchanges and other trading places. As with any marketplace, supply and demand determine the price. But one thing is always the same: buyers and sellers face each other directly.
Opaque primary market
The situation is completely different in the primary market: Here, an intermediary - the bank - always stands between the investor (buyer) and the issuer (seller). This leads not only to an asymmetrical distribution of information, but also to a high degree of non-transparency. For example, both bookbuilding and allocation are carried out by the banks - without issuers and investors being able to inspect the process and without clear and transparent rules. One rightly wonders who has an interest in this lack of transparency. And because the price range (spread range) is defined by the banks on the basis of their own assessments, it is also fair to ask whether the issue price corresponds to the optimal balance of supply and demand.
Kill a stupid rule!
So what can be done to eliminate this intransparency and achieve a symmetrical distribution of information? The recipe is as simple as it is efficient: Kill a stupid rule! Or, to put it in less brute terms: We replace the intermediation practiced by banks to date with disintermediation. Here, issuer and investor face each other directly. Bookbuilding is determined by auction - and allocation follows clear, fully communicated rules, as has been common practice on the secondary market for years (matching rules).
Closed auction for optimum price
Auctions are the ideal way to ensure fair pricing in the primary bond market. Valyo has decided to follow the approach of the Swiss National Bank and the U.S. Federal Reserve (Fed) and therefore relies on the closed, Dutch auction with uniform-price technique. In this process, investors submit their individual bids without knowing those of the other buyers. The allocation is then made to all investors at the same price (or spread) at which the volume of the issue is reached. This approach follows the assumption that the institutional investor base in the Swiss capital market is relatively small and that the participants are well informed.
Real market price for undistorted valuation
If pricing in the primary bond market is most effectively determined in an auction, it should ideally take place directly between the issuer and the investors. The spread range set by the seller at the start of the auction can be based on the secondary market curve and will therefore tend to be wider than in conventional bookbuilding. This allows the market to find an optimal price. The advantage of this "real" market price is the unbiased valuation of a given bond at a given point in time. It also gives all auction participants the certainty of having achieved the right price.
Valyo brings together what belongs together
While the secondary market for bonds is fully digitized and correspondingly transparent, the primary market has a lot of catching up to do in this respect. With direct auctions between issuers and investors, Valyo ensures maximum transparency and always guarantees a market price that reflects supply and demand. While Valyo recommends the wide spread approach to issuers, the narrow spread approach is also possible. In either case, Valyo's revolutionary approach to disintermediation in the primary bond market provides fairness, transparency and efficient price discovery to all parties involved.