This article was originally published in MarketWatch. To read the full piece, click HERE
Technology and innovation in capital markets over the past decade has dramatically changed how stocks are traded. Things like zero-commission trades, mobile investing apps, and fractional shares have significantly lowered the barrier to entry for the stock market, and helped contribute to the boom in retail investing that took place around the COVID-19 pandemic.
Now, it seems like fintech companies are trying to recreate something similar for the bond market.
There are a few things about buying bonds that are different from buying stocks. Bonds usually aren’t traded on exchanges, which means it isn’t quite as easy for retail investors to buy bonds compared with stocks. Retail investors can buy bonds over-the-counter from the bond issuer (like buying Treasurys from the U.S. government-backed website TreasuryDirect), they can buy ETFs that hold bonds as underlying assets or they can buy them through a financial institution that’s registered as a bond broker.
Jonathan Birnbaum, the founder and CEO of OpenYield, believed this made the retail bond market prime for disruption. Birnbaum spent years leading fixed income teams at Morgan Stanley and Bridgewater Associates and helping build brokerages of his own. During that time, he watched things like electronic trading and pricing algorithms fundamentally change supply side liquidity, but the way bonds were traded hadn’t actually changed that much.
Birnbaum told MarketWatch that he saw a few recent catalysts emerge. The first was the rise of interest rates, which sparked a renewed interest in investing in fixed income. The second was the rise of automated liquidity in the bond market, where technology allowed bonds to be traded at higher volumes. And the third was the growing number of retail investors entering capital markets for the first time over the past few years. Even though these retail investors were more focused on trading equities, there was an opportunity to offer them the ability to directly invest in fixed income.
Birnbaum started OpenYield, an alternative trading system (ATS) that acts like an exchange and connects buyers and sellers. OpenYield partners with market participants like brokerages, market makers and clearinghouses to bring more liquidity into the fixed-income market. Birnbaum said the aim is to modernize bond trading and execution the same way recent technology modernized stock trading—creating the stock market retail investors know today.
“The question becomes, what’s the route for getting this exposure to bonds?” Birnbaum told MarketWatch. “Traditionally, the route has been through mutual funds and more recently ETFs. But the emerging trend is to own the underlying bonds directly because you can achieve a better investment outcome due to customization and tax efficiency.”
