Episode 2: Under the Hood of the $8 Trln Corporate Bond Market

Tracy Alloway (0:04)

Welcome to this week's Odd Lots. I'm Tracy Alloway, Executive Editor of Bloomberg Markets.

Joe Weisenthal (0:09)

And I'm Joe Weisenthal, Managing Editor of Bloomberg Markets and the co-host of What You Miss.

Tracy Alloway (0:13)

It's Monday, November 16th, and I want to talk about bonds, corporate bonds to be specific.

Joe Weisenthal (0:20)

So I'm really excited about this episode because I basically know nothing about bonds. I know that when bond prices go down, yields go up and vice versa.

And I know sometimes credit quality is a factor and interest rates affect bonds. But beyond that, I'm a complete novice and I can't wait to just sit and learn from this discussion.

Tracy Alloway (0:40)

All right, but you know bonds are the things that companies sell to investors to fund their businesses, right?

Joe Weisenthal (0:45)

This I also know.

Tracy Alloway (0:46)

Do you know it's an $8 trillion market in the US alone?

Joe Weisenthal (0:49)

I knew it was gigantic.

Tracy Alloway (0:50)

Do you know how bonds trade?

Joe Weisenthal (0:53)

I knew a little bit, but mostly what I know is what you told me the other day.

Tracy Alloway (0:57)

OK, so what I told Joe the other day is that bonds are traded in a really old fashioned way still. So when you think of buying and selling stocks, for instance, it's usually pretty easy to do it. Investors, large and small, can do it just with the click of a button.

When it comes to buying and selling bonds, it's much more difficult. You actually have to pick up the phone, call a dealer at a big dealer bank, figure out price, size, and do the transaction that way. It's much less electronified.

Joe Weisenthal (1:27)

And part of the issue, too, is that everybody knows what a share of Microsoft is. There's one share of Microsoft common stock. But on the other hand, a company like Microsoft could have numerous different flavors of bonds, different years when they mature and stuff like that. And so there isn't a single Microsoft bond that you could just trade.

Tracy Alloway (1:45)

It makes trading much, much more complicated. But there are other factors underlying the bond market's resistance to change. And we're going to talk about those factors today.

And here to talk with us about them is Chris White, a former vice president at Goldman Sachs, and someone who, as we're about to learn, has had a lot of firsthand experience with the bond market and forcing through change on the market.

Joe Weisenthal (2:09)

Trying to bring it into the modern era.

Tracy Alloway (2:11)

Exactly. So Joe, I want you to sit back, relax, and try to learn something.

So Chris, tell us about your background in this space.

Chris White (2:20)

So I've been working in electronic fixed income business development for about 13 years.

I used to be a bond salesman, and then I was an equity arbitrage trader. For the past 10 years, I've been working on the dealer side. I would say the general responsibilities for my role were to help the credit market making businesses modernize. So I did that for Barclays and Lehman Brothers when we integrated, and then Goldman for the past five years, and I just recently left.

Tracy Alloway (2:47)

So let's talk about modernizing the corporate bond market.

Walk us through the way that the bond market trades now or has traded historically. Is it fair to call it old-fashioned?

Chris White (2:59)

No, it's just set a stage that I think all markets go through. There are three major stages to markets.

The first stage is a physical market in which human beings are directly interacting with each other in order for the market to work. And then what we're seeing in a lot of financial markets is what I call the hybrid stage, which is human beings interacting with each other through screens. And that's really where some of or a lot of the fixed income markets are going right now. And then you have the final stage that we're seeing in more electronically traded markets. I call them automated markets where you're really having algorithms interact with algorithms. And that's where you get high-frequency trading in FX and rates and futures.

But where we are from the bond market standpoint is I think we're really transitioning from stage one to stage two.

Tracy Alloway (3:49)

So something like the stock market would be probably at stage three, in your mind?

Chris White (3:54)

There are areas of the stock market that's at stage three. And I think that what gets confusing for a lot of people looking at markets is they tend to look at them with a sort of a one-size-fits-all and an inevitability around where the markets are going. That I would say, I call it sort of like a Skynet sort of view that eventually will, the machines will run everything.