Direct Match (YC W15) Aims to Make Bond Trading as Easy as Stock Trading
techcrunch.com
techcrunch.com
There's definitely an issue with getting prices in the FI market. When I was doing it, I used to create a Bloomberg chat with all the likely banks (the usual suspects) and blast them all a message like "EUR 2Y, 1MM/bp, what's your market?". And then wait as some guys were inevitably slower than others, and some people wanted to pull their prices before I got them all. And the more complex the product, the longer it took (swaptions for instance). And of course once you'd picked someone to trade with, everyone wanted to know what price it was. It was a real nightmare.
The question is how exactly this service is going to work. In principle, it's not that hard to distribute prices, especially if they're not actually tradeable like equities (then it gets hard!). I think I've seen at least one service that just gives you an indicative and tells you who to call. These days you could just do a filter with the banks you have docs with, and click and chat with whoever came out on top.
Implementation wise, I'd worry if the banks made it too hard to integrate with them. Even opening a firewall is something that can take time at big shops.
There's also a whole regulatory can of worms. Best execution, and all its consequences.
Mind. Blown. I always just vaguely figured that something as large as fixed income / debt markets, which look to be at least twice as large as equity markets[1], would have massive incentives for fintech to innovate much earlier.
[1] http://finance.zacks.com/bond-market-size-vs-stock-market-si...
We've built demand on the buy-side and are now reaching out to sell-side partners who are interested in moving the market forward. The parts of the sell-side that haven't invested in technology and are holding onto their old ways aren't very excited. The parts that have are a lot more open and we are looking forward to having them onboard on day one.
Would love to connect. First initial last name at directmatchx.com
The questions come to mind are:
1. if you are providing a service to provide price feeds: - for the on the runs, then places like retuters should be able to provide that data - for off the runs, there is much less liquidity/information as mentioned here, for that a price is often paid to dealers (so no change there)
2. If you are creating an exchange then this can possibly reduce the spreads for less liquid instruments - The interesting problem you'll need to deal with is how everyone deals with settlement.
I'm sure that a large proportion of derivative trades are still done over the phone, but that's because they tend to be (a) quite customizable and (b) quite hard to price.
It is incredible that treasuries are still traded over the phone, however, given how (relatively) easy they are to price. Even treasury futures, which are harder to price due to the basis and optionality, are mostly traded electronically, which tells me that there must be some parties with a pretty strong interest in keeping bond trading a "closed shop".
So I feel barely competent to purchase stocks, because there's honestly a lot of crystal ball holding involved. Is the company going to grow? Is that already priced in? Etc.
It seems like bonds are case where the returns will be paltry or risky, and when risk is involved, the small investor will be least good at measuring that risk.
1) What's the case for small investors to buy bonds, whether by buying them directly or via a bond fund? In this case, I recommend reading up on Modern Portfolio Theory and Asset Allocation or, if you just want practical information, just get a basic book like the Bogleheads guide.
Basically, since stocks are risky, investors typically hold a combination of bonds and stocks. Also, because the returns for bonds and stocks are (somewhat) uncorrelated, a portfolio with a mix of bonds and stocks can have better returns with less risk (variance) than a 100% stock portfolio. Assuming your bond and stock holdings are diversified (e.g. you buy and hold index funds), the main long-term investing decision you have to make is the % you allocate to bonds and stocks.
2) What's the case for small investors to buy individual bonds instead of just investing in a bond index fund? Well, depending on where you are, you can buy government bonds without brokerage fees, so your costs might be lower. But in that case it's harder to invest the coupons by yourself.
Of course bond returns are lower, but the risk is much lower too. In the case of short-term bonds issued by most developed countries, the risk of default is extremely small. The main risk is that unexpected inflation eats your returns.
here is from their website
"BrokerTec facilitates both API and manual trading for institutions, banks and non-bank professional trading organisations"
The core problem they are trying to solve is an example of something being broken by design:
>>> "the bond market doesn’t have a centralized system where traders can plainly see the fees involved in the trade. This means traders have to ask each bank, one by one, either by phone or electronically, what they are willing to sell a Treasury bond for."
This isn't exactly true - there are plenty of electronic quotes for small size. When you want to trade a lot of bonds - that's another story. The dealers don't want their prices out there electronically for any taker, because fixed income markets are relatively illiquid and the transparency can hurt them.
Not exactly sure how this will be overcome, but my general assumption is to borrow from the dark pool model for equities.
Could you elaborate?
A bond maturing in 30yrs has at least 10yrs of cash flows that line up with the 10yr bond. Since coupon interest payments can be 'stripped' from one bond and 'reconstituted' in another bond through the federal reserve, the price of matched-maturity zero coupon cash flows, even if they are stripped from different bonds, is the same. If they weren't, there would be an arbitrage opportunity to buy the cash flows of one bond and sell the cash flows of another bond, exchange them at the Fed, and lock in an immediate profit. Sometimes arbitrage opportunities like this do exist, but typically it's due to liquidity events where it becomes impossible finance offsetting positions. There's a good article on this called "Notes on Bonds: Liquidity at all Costs in the Great Recession" by Musto, Nini, and Schwarz
It's one of these markets that looks simple at first but there are lots of nuances that have caused it to take the shape it currently has. To be successful, I think Direct Match will need to do something a bit different than simply offering a CLOB.
I thought that, that marketplace is the bloomberg chat embedded in the bloomberg terminal, and IMO it's working good enough for big banks, I understand that lowering the barrier entry for FI will bring more liquidity but it's going to be a tough sell for big banks, which have >90% bond trading marketshare .
I think the typical way is to buy TLT ETF which is very liquid. But I'm curious if you guys tried any retail brokerage way of buying and holding onto treasuries directly or even if it's worth it.