Automated Bond System - Explained
What is an Automated Bond System?
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Table of ContentsWhat is an Automated Bond System?How Does an Automated Bond System Work?History of the Automated Bond SystemAcademics Research on Automated Bond System ABS
What is an Automated Bond System?
The Automated Bond System (ABS) is an electronic system for bond information and bond trading. ABS is a digital platform for the New York Stock Exchange (NYSE) that tracks the prices and records the bids and offers of inactive bonds until they are canceled or executed on the exchange. ABS served as a computerized platform for NYSE between 1977 and 2007 and was actively used during the period.
How Does an Automated Bond System Work?
The Automated Bond System tracks the prices, bids, and offers of any type of inactively traded securities on the New York Stock Exchange. Examples include corporate bonds, Treasury bonds, municipal debt securities, and others. Tracking the prices, bids, and offers of inactive bonds is important to investors, and the ABS serves as a database to access all information on inactive bonds. Debt securities that have low trading volume are referred to as inactive bonds, these bonds are characterized by volatility and illiquidity. Given the nature of the inactive bond, they often do not have meaningful market prices, because they may not sell for days or weeks. Inactive bonds are otherwise called cabinet securities because they are not constantly traded and remain on the cabinet for a long time. Given that inactive bonds are traded in low volume and there is no significant changes to their prices, bids, and offers, investors often find it hard to access information about them. The Automated Bond System gave a solution to this as it comprises a database where information about inactive bonds can be accessed until they are canceled or executed on NYSE. The ABS paved the way for the electronic monitoring of securities in the inactive category in which a good inventory of bond prices is kept to enable investors to access transparent prices when they want to purchase them.
History of the Automated Bond System
The Automated Bond System was introduced in 1977 as an electronic system to track the bids and offers and prices of inactive bonds. ABS, as used in the market as a trading system helped to simplify the complex processes and made transparent information on inactive bonds accessible to investors. The ABS was used between 1977 and 2007 and it allowed for the trading of 1,000 debt securities. Investors or traders are required to pay an annual subscription fee of $15,000 to NYSE to use the ABS, in addition to the transaction fee charged by NYSE.
Academics Research on Automated Bond System ABS
- An empirical study of bond market transactions, Hong, G., & Warga, A. (2000). An empirical study of bond market transactions.Financial Analysts Journal,56(2), 32-46. Short histories of dealer-market and exchange-based bond transactions in machine-readable form have recently become available. They permitted us to provide for the first time direct estimation of the effective bid-ask spread for corporate bonds in the institutional and retail markets. Overall, we found effective spreads for NYSE-traded corporate bonds to be similar to effective spreads for dealer-market transactions. Evidence is that corporate bond spreads have declined over time and that dealers carry out U.S. government bond trades with major institutional clients as a nonprofit service, perhaps to support other (ostensibly) profitable activities. We demonstrate that bid-ask spreads and the magnitude of price discrepancies between data sources are reliably associated with proxies for risk and liquidity.
- Corporate bond market microstructure and transparency-the US experience, Edwards, A. (2006). Corporate bond market microstructure and transparency-the US experience.BIS papers,26, 31-38.
- Markets: Transparency and the corporate bond market, Bessembinder, H., & Maxwell, W. (2008). Markets: Transparency and the corporate bond market.Journal of economic perspectives,22(2), 217-234. For decades, corporate bonds primarily traded in an opaque environment. Quotations, which indicate prices at which dealers are willing to transact, were available only to market professionals, most often by telephone. Prices at which bond transactions were completed were not made public. The U.S. corporate bond market became much more transparent with the introduction of the Transaction Reporting and Compliance Engine (TRACE) in July 2002. Beginning that date, bond dealers were required to report all trades in publicly issued corporate bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. In this paper, we describe trading protocols in the corporate bond market and assess the impact of the increase in transparency on the market. We review how TRACE has affected the costs that corporate bond investors paid to bond dealers for their transactions. We canvass the opinions of a variety of finance professionals and consider articles in the trade press to obtain a broader view of the impact of transparency on the corporate bond market.
- Corporate bond market transparency and transaction costs, Edwards, A. K., Harris, L., & Piwowar, M. S. (2004, September). Corporate bond market transparency and transaction costs. InFifteenth Annual Utah Winter Finance Conference. Using TRACE data - a complete record of all US OTC secondary trades in corporate bonds - we estimate average transaction cost as a function of trade size for each bond that traded more than nine times in 2003. We find that transaction costs are higher than in equities and decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds that will soon mature have lower transaction costs than do other bonds. Costs are lower for bonds with publicly disseminated trade prices, and they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders would significantly benefit if bond prices were made more transparent.
- Designing electronic market institutions for bond trading, Fan, M., Stallaert, J., & Whinston, A. B. (2000). Designing electronic market institutions for bond trading. InCreating Value in Financial Services(pp. 303-325). Springer, Boston, MA. Recently, there has been a growing interest in electronic bond trading. Unlike for stocks, there does not exist a central exchange for bonds. The markets for debt securities, including U.S. Treasury securities, municipal bonds, and corporate bonds have trailed the equity markets in the use of technology (SEC,1998b). The efficiency of the bond market is of great importance to all aspects of the economy. The significance of todays bond market is demonstrated by its sheer size. U.S. Treasury securities outstanding alone account for more than $3.4 trillion, and for trade of more than $200 billion per day in 1998, compared to the daily trading value of about $28 billion on the New York Stock Exchange (NYSE) in 1998 (SEC,1998a). But, it is estimated that only one to three percent of the U.S. Treasury securities are traded electronically (Wall Street & Technology,1997). Most of the brokers/dealers in the bond market execute trades by using the telephone and fax machine. This people-intensive trading is not very efficient and hinders real-time market information collection and dissemination.