The fragmented nature of the bond market makes it difficult to copy structures used to trade equities digitally, leaving private and institutional investors to trade bonds manually, often a long and complex process.
This has made bond trading expensive, non-transparent and time consuming. Due to the complexity of the bond market, retail investors in particular have only had the option to place their orders over the phone.
Over recent times we have begun to see the emergence of electronic solutions for trading bonds in the retail space designed to eliminate manual processes and drive down costs. These solutions can be viewed somewhat as digital disrupters to, or democratisers of, bond trading in the often overlooked retail space.
Unlike equities, bond prices are formed over the counter through an opaque cocktail of indicative pricing and different liquidity profiles from bond to bond and market to market. The new technology being offered to retail investors by a number of industry players addresses these issues, allowing the digital trading of bonds with improved execution speed and transparency.
This technology has a number of benefits for retail investors. The technology often provides the trader with the best bid and offer prices available in the market at the time, as well as the best price available for a transaction at that very instant. These systems also claim to provide significant price improvements due to managing an optimised dealer auction among market makers for corporate and government bonds.
One such provider of digital retail trading platforms in Australia is Saxo Capital Markets. Saxo is a member of the broader Danish based Saxo Bank Group that currently services clients in 180 countries world-wide. Saxo is the first in Australia to provide a fully automated front-to-back online bonds trading solution in the retail space.