Historically, broker quotes were commonly obtained by credit managers, but usage of such quotes has declined. This is due in part to the rising popularity of using pricing vendors for the reasons noted in Chapter 2.
As their job is to trade credit positions, brokers have limited incentive to provide accurate prices to credit managers. To the extent that a market transaction is conducted at a reasonable size, brokers provide an excellent data point on the price of that traded position. Considering the best price is the one that market participants are willing to trade on, these broker quotes are especially powerful in this context. However, quotes become less reliable when brokers are simply asked at reporting periods for their estimated price on a security.
These days, broker quotes are typically collected in situations where the primary price is challenged by the deal team, or is outside the range when compared with a secondary price. Credit managers use these broker quotes to “break a tie”’ because brokers, considered as market makers, are quoting buy or sell prices to make a deal.
Credit managers should evaluate data received from brokers on a periodic basis. If a broker provides bid and ask quotes with small size, it may mean that demand exceeds supply and the broker can get better deals at smaller lots. However, small lots could also be an indication of a broker simply testing the market, which would indicate a quote that is unreliable.
These quotes are referred to as “indicative” in that a counterparty is not obligated to trade with that broker at that price. It is therefore always prudent for a credit manager using broker quotes in its pricing process to verify if those quotes are actionable vs. merely indicative.