Explaining liquidity scores to customers

On the methodology for the liquidity scores, you can find it below:

2 Stars: >10% AND ≤ 200 bps / 40 yield bps

3 Stars: >50% AND ≤ 150 bps / 30 yield bps

4 Stars: >75% AND ≤ 100 bps / 20 yield bps

5 Stars: >90% AND ≤ 50 bps / 10 yield bps | 1 Star: <10% OR > 100 bps / 20 yield bps

2 Stars: >10% AND ≤ 200 bps / 40 yield bps

3 Stars: >50% AND ≤ 150 bps / 30 yield bps

4 Stars: >75% AND ≤ 100 bps / 20 yield bps

5 Stars: >90% AND ≤ 50 bps / 10 yield bps | 1 Star: <10% OR > 100 bps / 20 yield bps

2 Stars: >10% AND ≤ 200 bps / 40 yield bps

3 Stars: >50% AND ≤ 150 bps / 30 yield bps

4 Stars: >75% AND ≤ 100 bps / 20 yield bps

5 Stars: >90% AND ≤ 50 bps / 10 yield bps |

Liquidity Scores are a derived pricing metric intended to provide users with an idea on the recent liquidity of a bond, allowing them to understand how easy it may be for them to enter or exit their positions today. See below on more information:

1. Aggregate Liquidity Score. This score is a composite measure that assesses the market liquidity of a security. It considers two factors:
   • The proportion of time a bid (buy price) and an offer (sell price) were present in the market over the past two weeks.
   • The average bid-offer spread at the top of the order book, which is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (offer). A smaller spread indicates higher liquidity.
   • For example, for a bond to have a liquidity score of 5 stars, it must have a two-sided market at least 90% of the time and have an average bid-offer less than either 50 price bps or 10 yield bps.
2. Rating Categories. The liquidity score is presented in a 1 to 5 star rating system for three different investment sizes: Micro (≤$10K), Retail ($10K-$100K), and Institutional ($100K+). Each star rating corresponds to a range of time the bid and offer are present, as well as a range for the average bid-offer spread in basis points (bps) for bonds or yield basis points for other fixed-income securities.
3. Retail Relevance. For your customers, the best liquidity score may be the micro liquidity score (which is based on small trade sizes) if the average trade size is between $1K and $10K. The star ratings are as follows:
   1. 1 Star: Less than 10% of the time there is both a bid and offer, or the spread is greater than 100 bps / 20 yield bps.
   2. 2 Stars: More than 10% of the time there is both a bid and offer, and the spread is 200 bps or less / 40 yield bps or less.
   3. 3 Stars: More than 50% of the time there is both a bid and offer, and the spread is 150 bps or less / 30 yield bps or less.
   4. 4 Stars: More than 75% of the time there is both a bid and offer, and the spread is 100 bps or less / 20 yield bps or less.
   5. 5 Stars: More than 90% of the time there is both a bid and offer, and the spread is 50 bps or less / 10 yield bps or less.

The more stars a security has, the more liquid it is considered to be, meaning it's easier to trade without large price concessions. For your customer, understanding these liquidity scores can help in assessing the risk and tradability of securities and also help you filter the bonds you'd like to offer to your end customers. Let me know if you have any follow-ups to these.

Example: Public.com

Definition:

The liquidity score is a proprietary analytic calculated by Moment that provides investors a sense of which bonds are liquid and highly tradable in both institutional volume and smaller retail sizes. The liquidity score is a star-based ranking system, provided out of 5 stars — 5 stars represents highest liquidity, while 1 star represents lowest liquidity. Inputs into the calculation for a bond’s liquidity score include various factors such as how many times it has been traded in small size, what percentage of quotes have a minimum size of 1, and others.

Context and why it is important:

Correspondents can use the liquidity scores of bonds to determine which bonds to include in their tradable universe for end users. End users can use the liquidity score to inform their decision-making as well. Understanding liquidity of bonds for retail investing is important because investors are likely to get better, more fair pricing, for bonds that have higher liquidity scores, as with more trading volume (more liquidity) prices shown are more likely to represent the true value of the bonds. When markets are illiquid, traders may find themselves stuck with bonds they can't sell (or can't sell without a significant price drop).

Liquidity Scores are a derived pricing metric intended to provide users with an idea on the recent liquidity of a bond, allowing them to understand how easy it may be for them to enter or exit their positions today. See below on more information:

Aggregate Liquidity Score.

This score is a composite measure that assesses the market liquidity of a security. It considers two factors:

• The proportion of time a bid (buy price) and an offer (sell price) were present in the market over the past two weeks.
• The average bid-offer spread at the top of the order book, which is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (offer). A smaller spread indicates higher liquidity.