Here's Why It's So Hard to Fix the Corporate Bond Market

Odd Lots

Bloomberg

News, Investing, Business, News Commentary, Business News

4.4 • 1.6K Ratings

🗓️ 18 November 2021

⏱️ 58 minutes

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Summary

The corporate bond market is huge and important, allowing U.S. companies to tap investors for much needed borrowing. But even as sales of bonds have been booming in recent years thanks to low interest rates, the overall structure of the credit market and the way such debt is traded has been criticized for years. While stocks trade electronically on exchanges that provide instant and competitive quotes, a majority of corporate bond trades are still done over the phone or on platforms that tend to favor certain participants over others. Despite many efforts to improve ease of trading and price transparency in this vital market, progress has been slow.

On this episode, we speak with Larry Harris of the USC Marshall School of Business and a former Chief Economist at the U.S. Securities and Exchange Commission, where he helped push through major stock market reform known as Reg NMS, about why the corporate bond market has been so resistant to substantial change. Harris was also part of the SEC's most recent effort to improve corporate bond trading -- the Fixed Income Market Structure Advisory Committee (FIMSAC) created in 2018. He explains why it hasn't had much success in changing the market.

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0:55.1	Hello and welcome to another episode of the Odlots podcast. I'm Tracy Alloway. My co-host
1:00.8	Joe Weisenthal is a way, which means I get a chance to talk about one of my all-time favorite
1:07.2	topics, which has to be bond market structure, and particularly the evolution or sometimes lack
1:15.0	thereof of that structure and the way that a massive, massive market is actually traded.
1:21.7	So, when people think about the corporate bond market, I think there's a tendency to think
1:27.6	way back to sort of Liars poker era corporate bond trading. Like this was the big business on Wall
1:36.3	Street. People made lots of money from it. You had certain personalities that were tied to it,
1:42.8	and it was sort of old-fashioned the way bonds were traded. And then fast forward to post-financial
1:49.2	crisis, the 2010s, and surprisingly even as the stock market had largely electronefied, the
1:57.5	corporate bond market was still pretty much operating like it had in even the 1980s. Trades done
2:04.6	by phone, some trades done by facts kind of amazingly. And then if you fast forward to 2020-2021,
2:13.6	we've spoken a lot on the show about the idea of the pandemic forcing or increasing the rate
2:19.8	of digitalization in the broader economy, the idea of everyone ordering stuff online, and more
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