The New York Stock Exchange is on the verge of getting approval to trade corporate bonds of non-exchange listed companies--an exemption that will herald the Big Board's relaunch of its automated bond trading system this year. But bond and market experts, while applauding what could be increased transparency and competition in the bond market sparked by the reinvigorated system, doubt its effort can succeed.
In 2000, more than 100 electronic bond trading companies cropped up. More than half have folded since then, leaving 46 operating in the U.S. in 2004. Bad business plans, market turndown, lack of buy side participation, systemic problems and competition from well-established players felled most of them. Some of these same issues may loom over an upgraded NYSE system as well.
The Big Board's bond trading system, around since 1977, is only allowed to trade the bonds of its listed companies, a small number (1,000) of the total market (75,000) and trades only about $10 million worth of bonds a day. The Securities and Exchange Commission is expected to change all that, exempting the NYSE, so it can trade bonds not listed on its exchange. The NYSE will add about 5,000 bonds for trading in the months following the SEC approval, which will be continuously quoted and aimed at the 56% of orders that are 25 bonds and below--or $25,000--the range of a retail order or an odd lot from retail investors, private wealth managers and money managers. "We're trying to create a centralized place to trade bonds," said John Holman, v.p. fixed-income, who joined this spring to lead the expansion.