| NEW YORK (Dow Jones) -- While human beings are a rarer and rarer sight on modern electronic stock exchanges, the vast majority of trades in the corporate bond market are still executed in time-honored fashion between buyers and sellers -- over the telephone.
"I guess you could say we are still in the dark ages," said Joe Balestrino, a senior fixed-income portfolio manager at Federated Investment Management Co. " The conversion [to electronic trading] has been slow in the non-government sector."
Outside the corporate sphere, electronic trades are prevalent for U.S agency and Treasury debt. Many Treasury trades are executed over the Treasury Department's popular www.TreasuryDirect site.
MarketAxess, a trading-systems specialist group that has developed programs for the fixed-income market, estimates that its platform tracks about 95% of all U.S. and European electronically executed corporate bond trades. But only about 11% of the overall corporate bond market trades electronically, according to MarketAxess.
The bond industry has no exchanges as such, so most trades are done by the bond departments of major investment dealers. It's generally left to bond dealers to "make a market" by providing enough liquidity and information about a particular group of bonds for both buyers and sellers to be comfortable making trades.
T.J. Marta, a fixed-income analyst at RBC Capital Markets, said he believes the complexities of bond instruments themselves makes it likely that humans will be needed to help investors sort through the intricacies of various fixed-income instruments for a long time.
"I used to be a currencies analyst and a dollar was a dollar and a euro was a euro," Marta said. "But bonds are much more complex. They are anything but clear-cut. The word 'bond' actually conveys a varied set of securities that are hard to understand. The data fields are so different between, says, a muni, a swap, a repo and other bond types."
And then there is the size of the bond market. The New York Stock Exchange and Nasdaq market combined offer about 8,000 stocks, while the U.S. bond market's assets probably total 800,000 issues, according to Michael Decker, a senior managing director for research and policy at the Securities Industry and Financial Markets Association.
Further complicating efforts to automate the entire corporate market is the infrequency of trades. "Most stocks trade every day," said Decker. "But many bonds can go months without a trade. It is not possible to list daily quotes for many products. If you need to sell a bond, you will need to go to a dealer for a quote."
Yet MarketAxess estimates that the corporate bond market, bit by bit, is being won over to the efficiencies of electronic trading. Total electronic market volumes on the MarketAxess platform last month reached $38.2 billion, up 36% from $28.1 billion in June, 2006.
Stephen Davidson, a spokesman for MarketAxess, said he thinks sales of the platform may have hit an inflection point, with the sales gains poised to accelerate shortly.
MarketAxess' main competitor is TradeWeb, a network of online fixed-income markets owned by Thomson Corp. (TOC) .
Both platforms essentially serve as messaging systems that allow prospective buyers to receive multiple quotes from various dealers for the bonds they wish to buy. The systems also let investors execute trades online. Prior experiments that featured multiple price quotes without the names of the prospective sellers did not catch on, although that structure can work well for online stock-trading sites.
MarketAxess' Davidson concedes that conversion to electronic trading has been slowed by a "relationship" issue. "Over the phone is still the traditional way to trade," he said.
A trader at a large regional brokerage put it succinctly. "When I do business, I like to talk to a person," he said, summing up how the vast majority of business deals have been conducted since the dawn of human history.
"There is an intangible added value that a human relationship brings," said Federated's Balestrino. "In this business, the traders that truly succeed are the ones that can put themselves in the shoes of the other parties."
"There is also the fact of human relationships, friendships that build up in the industry," he said. "But people ultimately come to work to make money, not friendships. So I think the industry will change over time."
SIFMA's Decker's best guess is that investment-grade corporate bonds more and more will be traded electronically, as that sphere is easier to commoditize, given that high-quality bonds are more transparent.
But high-yield or speculative junk bonds are much harder to analyze. "Each one is quite unique, with its own story. Both sides have to do a lot more due diligence to determine the proper value."
Given the complexities and risks of the junk sector, "There probably will always be room in the bond industry]for the human voice," he said.
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