A mystic voyage into fixed income trading

Mitali Kalita
03 December 2003

Chennai: Bonds are known to be the most effective remedy for financial risks of the global economy. They serve as the funding source for governments and thus act as catalysts for a well-balanced economic environment. In addition to this, the introduction of electronic trading systems in bond trading has brought the US bond market from a so-called ''neglected'' state to that of becoming the ''hottest'' topic on Wall Street.

Tower Group, a research firm in Needham, Massachusetts, predicted in a recent report that 68 per cent of all bond transactions will be electronic by 2005, up from 33 per cent in 2001. Similarly, another recent survey by the Bond Market Association (TBMA) estimates that trade volumes have grown an average of 70 per cent, with individual rates ranging from 20-140 per cent.

The flourishing era
Online trading in the bond market flagged off around six years ago in 1997. During the three initial years (from 1997 to 2000), the market witnessed a huge proliferation in electronic bond trading platforms. Participants rushed to take advantage of the lucrative market opportunities and the ostensibly unlimited access to funding.

The move reached its zenith during 2001 with the list of electronic trading platforms reaching almost 90 — up from 11, 27, 40 and 80 in 1997, 1998, 1999 and 2000, respectively. If we include financial institutions'' own websites, the number touches more than 300.

Source: Celent Communications

The ease and comfort of dealing with e-bonds totally changed the nature of the fixed income market. Customers who were reluctant to invest in bonds for fear that they would not be able to sell them easily at a reasonable price started finding bonds more attractive.

When we analyse the driving force behind this trend, we find that there are five factors that contributed towards the success of electronic bond trading. These factors are: