Stock markets have been using automated trading tools for a long time now. Nowadays, the digitization of these programs buy and sell more stocks on their own and without any human intervention, than human initiated sales. Even with the successful implementation of automated sales programs for the stock market, these bold tools have not been implemented as much in bond trading.
According to The Economist, one reason why automated trading tools are not used in bonds is due to the lack of action. There was never enough volume or enough trades to warrant the use of automation. Additionally, the trading programs have been limited in scope and allow only dealers to instigate sales. That is about to change as the current crop of new tools allow bond trading no matter who instigates. Or to put it in a different context, everyone is a dealer.
It was not an overnight development. Tradeweb started trading in a limited number of US Treasury bonds in 1998. The electronic trades have grown steadily and now account for around half of U.S. Treasury bonds, and 60% of European government bonds. Corporate bonds have not been keeping up, however, as estimates show that only 25% of corporate bonds are traded electronically.
One reason for this is the diversity in type of corporate bonds. The diversity stems from the quality of the bond sale, as well as the hierarchy of payment of these debt instruments. One use of corporate bonds is to float funds or raise funds as a tradable debt. However, each bond release also has a hierarchy of payment in case the company files for bankruptcy. It is ironic that this should happen since bonds are usually used as additional capital and can be an instrument for growth or to prevent bankruptcy.
With the new model of trading corporate bonds, it is not only the dealer who can buy and sell, but also the fund manager, and everyone else who can get their hands on funds or bonds. This creates an environment where there is competition to buy and sell bonds. The demand increases because of this. Instead of a bond being traded once or twice a year, it is now being traded up to five times annually.
Unlike digital currencies such as bitcoin, bonds are well-accepted and stable financial product. Digitization may soon come to bond trading, as there is now a bold initiative to fully automate the bond trading process. There are also protocols being set in place setting scenarios for different manners of bond trades, including buying a different bond with the sale of bonds, or of hedging the money from the sale of bonds. This will impact on the liquidity of the market.