There's a new player in the bond trading business.
Everyone knows it's getting harder to trade bonds. Jamie Dimon, Bill Gross and others have all complained about the lack of liquidity. Enter Liquidnet, which runs a dark pool for electronic trading in stocks. On Tuesday, the firm began operating a dark pool to trade bonds.
They're the latest organization to try to bring bond trading into the twenty-first century, by trading electronically. CEO Seth Merrin's hope is that it will attract much-needed liquidity to the industry.
It's an old problem: there is no central facility to trade bonds, like a stock exchange.
Partly, it's because bonds are much more heterogeneous than stocks. There's about 5,000 listed stocks in the U.S., but roughly 2 million individual tradeable bonds.
Bonds traditionally trade over-the-counter, between dealers—usually banks, and there have been attempts to get bonds to trade electronically, just like stocks do. Those efforts have been met with very limited success, however, partly because the banks who control the trading don't want to do it.
That was fine when banks had capital to trade bonds, but because of all the new regulations, that capital has gone away.
Merrin says that as of June, 2015, dealer inventories in bonds are down 75 to 90 percent to roughly $18 billion—a drop in the bucket in a $7.8 trillion market. Meanwhile, the amount of corporate issuance has shot up dramatically because of the low interest rates.
A lot more bonds with a lot less liquidity is a recipe for trouble, Merrin says.