A few trends quietly trail away without leaving a mark behind, while others unexpectedly implode like it was always foreordained. Electronic bond trading belongs to the latter category.
Digital transformation has upended the entire bond market, marking a rapid shift towards electronic trading. The belief that fixed income trading is imperviable to progress or change has been clearly confuted. Although it is hard to standardize bond trading due to extensive options available, electronification is making it possible to a great extent.
We can’t deny the fact that technology is stimulating growth in almost every sector, be it hospitality, banking, or healthcare. Let’s unravel how it is affecting the development of a market that has not yet adopted digitalization completely.
The Dawn of Electronic Trading in Bond Market
The bond market is highly fragmented with millions of bonds bearing distinct characteristics. This always made market leaders believe that the bond market can’t be easily digitized like equities and investing via mutual funds is the only option to practice trading. However, that notion has finally paid off with the looming digital era in the market.
The trading infrastructure has been completely upended, making a dramatic shift from traditional proprietary desks to electronic trading. The recent launch of a website-based platform named ‘Retail Direct Account Scheme’ by RBI opens new horizons for retail investors. It enables them to trade online in government securities in retail lots by opening an account with the central bank.
This has invited several app-based and web-based platforms to enter the bond market and simplify digital transactions for capital bond trading along with G-sec. No human interaction required, seamless account opening process and ease of trading have spurred the demand from investors. Beyond trading, the electronic set-up allows the parties to:
- Frequently access data on bonds
- Source up-to-date bond prices existing in the market
- Contact dealers/bankers that lend best offers
- Track positions that best match the needs
- Analyze, evaluate trading post it’s done
All these wooing benefits have been made possible due to ‘Technological Advancements in the Bond Market.’ Tech-enabled bond trading platforms have empowered small investors to trade cost-effectively. They’re no longer required to maintain large tick values of lakh or crore. With this, investors are consistently seeking high-yield bonds to get better returns. Further, it allows all parties (dealer, fund manager, etc.) to get their hands on trading five times a year and not just once/twice.
Therefore, technology not only optimizes the costs but also simplifies the complex process, brings in speed, improves decision making, and lends utmost reliability.
Leading Online Bond Trading Protocols Making Great Strides
As technology expands the purview of fixed-income trading, several service providers have come up with digital bond trading websites/apps having engaging features. Bond platforms offer government securities, financial instruments with AA, high-quality corporate bonds, and more. The securities are either transferred via clearing corporations or on the stock exchange. Hence, they strike reduced counterparty risks by offering secured digital transaction space.
Goldenpi.com is one such leading platform that displays bonds in the spotlight and helps retailers find the entire yield details. Retailers can invest as low as 10k in seconds from an extensive collection of bonds. Indmoney.com lists various bonds from their inventory via an in-built bonds section on their website.
BondsIndia is another e-trading protocol that facilitates the online trading of fixed-income securities. It lets retailers invest in corporate bonds, government bonds, fixed deposits, and more. Retailers can discover the bond prices in real-time by tapping into sections – ‘deal of the day,’ ‘market insights’ and ‘bonds portfolio.’
Bondskart.com has an e-trading app that sheds light on the inventory of bonds on a particular date, having varied categories from which investors can select based on credit rating, issuer profile, coupon payment frequency, etc. It features a minimum investment quantum to let you pick bonds as per your lot size. What seems more interesting is it also lends details about the bond’s YTM, making it easier to get a quote while selling.
Indiabonds.com houses a multitude of bond categories that cater to easily accessible investment options lending excellent returns. The categories such as ‘bank,’ ‘high yielding,’ ‘tax-free,’ ‘G-sec’ and more make it simpler to build a portfolio.
Such sites and apps are expected to consistently mark an upward tick with a further rise in digitization.
Bearing the Benefits of AI-equipped e-Trading Systems
AI-powered electronic trading platforms have propelled Indian bond markets into a rapid growth phase. Technological breakthroughs benefit both asset managers and dealers by establishing a transparent bond market. Whether it be the case of pre-trade, at-trade, or post-trade, technology is ruling the roost in the bond market.
While dealers en route from predominant and preferred investment way of mutual funds to e-trading, they experience a slew of benefits including cost-saving and information on YTM. To asset managers, AI-based platforms lend essential pricing details and dealers’ performance while they are initiating the trade. On the contrary, dealers can leverage tech advances in identifying clients’ interests, liquidity, and connecting the most efficient client.
Such advanced trading platforms allow clients to express their investment interests with a firm offer for a specific tick size. Each of these bids is accessible to the asset manager (trade initiator), dealer, and all the clients who have made a bid. Hence, participants can benefit from price discovery, complete transparency, and the finest market-clearing price.
Issuing Bonds on Blockchains – Asset Tokenization
Applications of blockchain technology have a significant impact on the functioning of bonds lifecycle – from issuance to settlement. The debt capital markets in India are negligible when compared to international countries. Financial experts have claimed ticket size and liquidity to be the most contributing elements for this insignificant situation of the bond market.
Most Indian bonds either have a face value of Rs 10 lakh and a few odd lots have smaller ticket size that ranges from 10,000 to 1 lakh. The latter category implies lower yield and hence, less liquidity while selling.
Given the Distributed Ledger Technology’s (DLT’s) benefits of utter transparency and stability of transactions, asset tokenization on the blockchain (conversion of assets like bonds into crypto-tokens) is expected to address these issues. If integrated, it will facilitate small investors with easy access and more liquidity.
These tokens can be raised at smaller values – as low as Rs 90/100 per unit which deals accurately with the problem of ticket size. Further, reflecting on the liquidity issue, with tokenized bonds at source, investors can make real-time transactions without any need for a third-party/intermediary.
Let’s have a rundown of how these AI-based smart contracts will prove to be valuable if brought to Indian markets. Leveraging the benefits of technology, DLT influences in the following ways:
- Enhances the trading lifecycle – transparent and secure distribution, allocation, hedging, settlement of transactions.
- Minimizes the settlement time from T+2 to T+0,
- Mitigates operational, liquidity risk & reduces administration costs, capital charges.
- Simplifies coupon settlement, an automated tax-related system such as the instantaneous issue of tax residency certificate.
- Offers additional verification checks to know if the issuer meets ESG requirements, cover pool needs, and more.
By removing multiple barriers to entry in bond markets, blockchain technology, therefore, will enable smaller players to tap productive investment opportunities with minimum fixed costs.
Fixed income e-trading is consistently growing from establishing government debt markets to tapping into corporate bond markets. Along with e-trading platforms, a few fintech have started decentralizing the bond market with tech algorithms and Robo advisors to help clients build bond portfolios effectively. Hence, if market participants are of the view that the corporate bond market isn’t making a shift towards advanced technology adoption, they should once seek the market’s minutiae to get it right and look for ways to diversify their investment options.