Types of Bond Trading

All of them, corporations, federal government, federal government’s agencies, municipal governments and foreign corporations issue bonds. Bonds are listed in every stock market or negotiated at the OTC.

After a bond is introduced in the market, it is negotiated in a secondary market that includes every stock market plus the OTC. The secondary market is that in which existing valuables are negotiated among investors through a broker (negotiator or market-maker).

Some corporate bonds are listed in the New York Bond Exchange and the American Bond Exchange. Information about these markets can be found in financial newspapers.

Bonds listed in the NYSE are negotiated through the Automated Bond System – ABS, a system based on a terminal used to negotiate corporate bonds from agencies and government. The ABS compares prices of orders carried on and then report market prices and negotiations to the market data vendors in real time.

Many corporate bonds are not listed in markets, but are negotiated in the OTC markets through bond negotiators. There is an active secondary market for Treasury bond  negotiations, formed by bond negotiators. The Federal Reserve Bank also participates in this market buying and selling Treasury bonds as part of their open market operations.

There is also a secondary market for bonds issued by government agencies such as those from the Federal National Mortgage Association (FNMA), the Government National Mortgage Association (GNMA), municipal bonds (as issued by state and local governments and the highway authorities) and foreign bonds. Bonds from the FNMA and GNMA are issued by private corporations and the government. These are bonds are supported by mortgage bonds.3

OTC market consists of thousand of agents-negotiators that not necessarily work in a determined place , but are all spread apart throughout the nation. They use computers and phones to make their trades. These agents-negotiators buy on their own name or as their clients brokers for whom they act as agents. So in this type of transactions agents and / or brokers receive commissions for allocating the order.

The agents-negotiators can act as brokers and receive commissions or as negotiators earn a sales percentage and a markdown when buying.

Brokers can be private persons or enterprises that group buyers and sellers without taking a stand when investing.

A markup is a raise in the valuable’s price. It is also the difference between the price asked by the negotiator and the price offered by the market-maker. A markdown is a drop in the valuable’s price. It is the difference between prices paid by the negotiator in buying the bonds to the market-maker.

Many brokers-negotiators specialize in a certain type of bonds. In other words they create a market on buying and selling bonds. How does this work when orders come from individual investors is shown in the following steps:

  1. An individual investor allocates a buy order over a determined bond in a broker’s agency.
  2. If the broker’s agency is a market-maker for this determined type of bond it’ll sell the bond to its client. For this type of bond in particular. If the agency is not a market-maker the agency will negotiate with another  that is.

The majority of bonds are bought through brokerage firms. The only exception would be the Treasury bonds which are relatively easy to buy directly through the Federal Reserve Banks.

Due that most bonds negotiated through brokers-negotiators do not have real market prices to show it is determined the lack of transparency in pricing bonds.

Other markets: Options are negotiated in the Chicago Board Options through the combined use of market-makers and brokers. These options are the most negotiated in the market. The regional Philadelphia Exchange also has a lsit of options. Futures and  future options are both negotiated in the Chicago Mercantile Exchange. The New York Mercantile Exchange also negotiates with future contracts.