I’ve discussed many times how much I appreciate the arrival of bond ETF’s because it helps retail investors such as myself have a fair shot at trading bonds. It’s amazing to me that in this age of transparency and speed trading, bonds remain an OTC market where buyers and sellers pay wide spreads to enter or exit their positions without truly knowing if they are paying a high price. That has made life miserable for smaller investors who usually end up getting screwed when buying and selling bonds.
It’s Easy To Understand Why Things Have Not Changed
One big reason of course is that the brokers that buy and sell these bonds do not really want to move to electronic trading. Why? There are many different reasons but a big one is the fact that these brokers would see much diminished spreads/profits on their bond trades losing an important part of their profits. Another part of course is that listing bonds is much more complex than stocks as there are millions of listings with different features, etc. That would certainly make things interesting for the exchange.
The Case For A Move To Electronic Markets
I think it’s about time that someone launched a better way to trade bonds. Why?
–Volume is way down: You could argue that part of the story is the lack of volatility and the record low yields that are not attracting buyers. But that is only part of the story. Offering a fair chance for all parties involved would certainly help pick volumes up.
–Added transparency: In an age where regulators are seeking increasing transparency, I think that moving all or most of bond trading to electronic trading would do a lot to increase confidence
–It can be done: A decade ago, traders thought it would be impossible for futures to trade electronically as stocks had done and yet that is exactly what has happened with even the Nymex moving to the 21st century trading world.
–Good for the economy: If companies could get a more clear vision of what their borrowing costs are on the bond market, it would help them better manage their debt more efficiently.
What is the Downside?
Even if not all issues (some are very illiquid) became listed overnight, I still think it would be a good idea and would improve the overall bond markets. Do you agree?