Small investors and brokers applauded the New York Stock Exchange's plans to expand the number of bonds it trades, claiming it will increase liquidity and help investors trade smaller amounts and securities that do not trade frequently. The NYSE plans to expand the number of bonds it trades to 6,000 from the 600 it currently trades on Dec. 1, pending approval by the Securities and Exchange Commission.
"It will have a huge effect on liquidity. It will be revolutionary," said one investor at a small hedge fund. He said the new platform will allow him to trade a small amount of bonds that brokers are less willing to trade because they do not earn as much commission. He also said it will make it easier to trade less liquid bonds that brokers often choose not to trade for their clients because it takes too long to find a buyer or seller.
The new bond trading platform, which replaces an existing Automated Bond System, is also supported by the Securities Industry and Financial Markets Association, the new entity formed between the merger of the Bond Market Association and the Securities Industry Association. In a comment letter filed with the SEC, SIFMA said the project will especially benefit retail investors and smaller institutions, and will improve transparency and market liquidity
The NYSE's new electronic bond trading platform, called NYSE Bonds, will include the corporate bonds of all NYSE-listed companies and their subsidiaries. Companies will not have to list each bond issued the requirement to list bonds has so far dissuaded issuers from trading their bonds on the exchange. The platform will allow broker dealers to put bids and offers into the system and the best bids are then matched up and trades will be automatically executed.
Currently most bonds are traded over the counter. These trades must be reported on the NASD's TRACE system 15 minutes after they are executed. According to one market participant, about $20 billion of corporate bonds trade daily over the counter, compared with only $500,000 on the NYSE.
One market participant said the new platform could lead to less trading in the over the counter market. But he added people trading securities on the exchange have to be a NYSE member or be sponsored by a NYSE member and for this reason people will still trade over the counter. The hedge fund investor said he will still do large trades with brokers in the over the counter market because they can be more discreetly executed this way.
John Holman, who runs the fixed-income group at the NYSE, said the NYSE's plan to expand its bond trading platform is a logical step for the exchange. He said, "It is a natural extension of what we do for our listed companies on the equities side. Why not their corporate debt issues as well?" Plans to expand the number of bonds trading on the exchange have been in the works for two years, but have been held up by failure to obtain approval by regulators.