Goodbye to Bond-Trading on the Telephone

The Securities and Exchange Commission has for a long time devoted a lot of attention to equity market structure: There are rules about how exchanges operate, and an Equity Market Structure Advisory Committee, and lots of attention paid to the perceived evils of high-frequency trading and dark pools and whatever. Bonds, meanwhile, were bonds. You just called up a bank and asked to buy some. The "market structure" in corporate bonds was the telephone. Of course there was a market structure, but it was tacit and sociological, made up of customs and relationships rather than rulebooks and exchanges. It wasn't as legible as equity market structure, so no one paid attention to it. Former SEC Commissioner Dan Gallagher liked to remark that the SEC had over 100 employees devoted to the equity markets, and just 0.5 employees -- half of one person's time -- focused on corporate bonds.

But that is changing. For one thing, bond market structure is getting more legible: As electronic trading platforms proliferate and replace dealers' telephones, there is just more structure to talk about. ("Our goal by the end of the year is that every trade we do is going to be done electronically," says the head of credit trading at Alliance Bernstein.) Also, though, people worry more about bond market structure than they used to. They worry more that the old unwritten customs of the bond market, which governed how dealers interacted with customers, were the wrong customs and need to be changed. And of course they worry about bond market liquidity: If it is too hard to buy and sell bonds, and if that difficulty might somehow lead to a market crash or even a systemic crisis, then probably someone should be thinking about it.