Newly-established bond trading platforms and recent investment activity in fixed income indicate there is a pressing need for transparency. Fixed income continually offers better trading and pricing practices, which are often the result of developments in the FinTech industry.
A modern bond trading venue
Banking Technology reported that a new trading venue called OpenBondX aims to improve discriminatory pricing issues that exist in the bond market. Created by former Lime Brokerage Chief Executive Alistair Brown, the platform is also a response to stricter capital rules from the SEC. Some bond dealers have reduced their inventories by as much as 70 percent since 2008, due to regulatory capital requirements. Taking into account the changes in fixed income, the creators of OpenBondX want to modernize one of the last major OTC markets by promoting transparency through technology.
“Part of the appeal for us is that fixed income is the last bastion of the non-electronic market,” said Brown, according to the news source. “We looked at that and saw we could make a difference. It’s a long way behind the equities markets, there’s no best execution, no trade-through rule – so the need for a modern trading venue was really there.”
OpenBondX is an anonymous marketplace and allows users to choose how much of their workflow they wish to display in the market at any point in time. Additionally, the platform has built-in controls that comply with SEC rules obligating trading firms to have adequate risk checks before entering the market.
“We felt transparency was important,” added Brown, according to Banking Technology. “In fixed income, there are a lot of complaints about people backing away, and there’s no requirement for quotes to be firm.”
“Investors need to know they can rely on market prices and that they are not flying blind.”
Current trends in fixed income
Given the potential interest rate increases in the fixed income market, exchange-traded funds are popular with investors these days, reported The Wall Street Journal. Bond ETFs saw $20 billion in capital investment through February, representing 67 percent of net flows to all exchange-traded products. ETFs provide investors with flexibility in achieving desired levels of credit and rate exposure in their portfolios.
The news source pointed out that unlike the stock market, bond indexing is not straightforward. While mortgage-backed and government securities are heavily quoted, many bonds are not traded for months. Values are often based on the combination of several factors, such as credit rating, interest rate and maturity date – not market price. Accordingly, ETFs are attractive to investors because they facilitate bond holding during times of rate and risk uncertainty, without adding superfluous pricing concerns to the mix. Ben Johnson, global head of Morningstar, explained why bonds are important to investors.
“Bonds are ballast. They take the sting out of declines in equities, but you still need diversification [within] fixed income,” said Johnston, according to The Wall Street Journal.
Ultimately, the introduction of new platforms to modernize bond trading and increased investment in ETFs both point to one thing – the need for transparency in fixed income. Investors need to know they can rely on market prices and that they are not flying blind. Fortunately, in today’s market, technology solutions are constantly under development, which promote transparency and help asset managers monitor their investments. New trading platforms help investors keep one eye on portfolio performance, and the other eye fixed squarely on the market.