Institutional investors are increasingly concerned about defining best execution for fixed income, according to a new report released today from Greenwich Associates.  The challenge is especially difficult in the investment grade and high-yield corporate bond markets, where there is less liquidity and containing information leakage is often more important than price.

This new report, Corporate Bond Best Execution, More Art Than Science, examines the challenges in documenting best execution in corporate bond trades, including how dealers are selected for quotes, how quotes on electronic platforms are evaluated, how internal policies affect decision making, and how prices are ultimately evaluated both pre and post-trade.

“Best execution is not always equivalent to the best price,” says Kevin McPartland, Greenwich Associates Head of Market Structure and Technology Research. “Indeed, the number of factors going into a trading decision is a major reason why defining best execution is so challenging.”

Much of the execution process in the corporate bond market is focused on which dealers to call first.  Three out of four traders participating in the study said that when determining which dealer to use on a given trade, firms perceived as standing behind prices quoted on screen get preference. While some were more concerned with consistency on large trades and some on small, the expectation that electronic quotes are firm, even if dealers technically do have last look, is increasingly prevalent.

Traders also take factors like fixed-income research into consideration – nearly 50% of buy-side high-yield bond traders will give first call to a dealer that provides them with valuable research.

“Despite the lack of defined regulatory requirements for best execution and with clients and regulators scrutinizing every aspect of the investment process today, documenting this decision process remains difficult for market participants,” says McPartland. “Investors must gather and store every piece of data possible to document that best execution was sought beyond a reasonable doubt.”

The results reviewed in Corporate Bond Best Execution, More Art Than Science are based on interviews with 114 high-yield credit investors and 119 investment-grade credit investors at asset management firms, hedge funds, insurance companies, banks, and other firms in the U.S.