Bonds are fixed income instruments which are issued
by an agency seeking debt and includes Sovereigns, local governments or
corporates. These instruments are issued in the primary market and then traded
in the secondary market similar to stocks. Traditionally, there has been a
major difference between the trading of stocks and bonds. While stocks have
been traded over exchanges, most bonds have been traded over the counter (OTC).
OTC is a form of direct trading between two parties generally through an agent.
Major reason for the bonds being traded over the counter was the sheer number
of bonds issued vs the stocks issued. Equity is generally issued once or twice
whereas bonds are issued several times over the lifecycle of the issuer.
Further, the bonds of a company can also be of different tenor and with
different coupon rates. Thus, there are many more variables associated with
bond trading. In the past limited computational power and the wide spread of
the bonds presented enormous challenges to these being traded over exchanges.
Thus, these were traded OTC. However, with the improvement in technology,
including increased computational power and block chain, trading of the bonds
over exchanges has been made possible. Trading of the bonds is trending towards
electronic bonds exchanges. Trading bonds over the exchanges has several
advantages. The most important advantage is the transparency which the
electronic exchange provides. The prices of the bonds have been historically
very complex. Electronic exchanges bring much-required transparency in the
bid-ask pricing. Another advantage of trading bonds over exchanges is the high
liquidity presented by electronic exchanges. Bonds traded over the counter or
through Exchange Traded Funds (ETF) have been highly illiquid. Electronic
exchanges have large data capacities. This allows a larger number of the bonds
to be listed. Another, important advantage of trading bonds over the electronic
bond exchange is the low cost per trade and large volumes of trade possible
over these exchanges. Only listed bonds would be traded over the bond exchange.
BondEvalue is a bond price tracking system and will
shortly operate a bond exchange. The salient features would be as follows.
Fractionalisation BondEvalue
would allow conversion of an existing bond in the secondary market equivalent
to US$200k into smaller denominated fractional bonds called BondbloX of
denominations of US$1,000
Electronic and Transparent BondbloX allows
trades through exchange. This ensures that the trade is totally transparent for
all the stakeholders.
