promised payments. Fixed-income instruments trade on dealer-oriented over-the-counter (OTC) search markets that differ dramatically from the more frequently researched equities markets, with a few exceptions.
Treasury bonds issued by governments are the simplest fixed-income instruments in many aspects, with low default risk, huge trading volumes, standardized contracts, and generally liquid markets. Bonds issued by firms and municipalities make up a significant portion of the fixed-income market.
Fixed-Income Investments vs. Stock Markets
The australian bond exchange markets have a lot in common. Each one aids in the discovery of prices and the execution of financial asset transactions. Investors wishing to purchase and sell do not always arrive in these markets at the same time, necessitating the use of intermediaries to provide liquidity. When these intermediaries trade on a principal basis, they absorb order imbalances into inventories and, as a result, they are exposed to price risk on the positions they take to facilitate transactions. Because the value of both fixed-income and equity instruments is determined by market-wide variables like central bank policy and macroeconomic growth, as well as issuer-specific outcomes, and because some participants may have better access to such information than others, asymmetric information risks arise in both markets.
Microstructure Differences between Fixed-Income and Equity
The submission of an opposite-direction order with a sufficiently aggressive limit price by another market player results in an immediate trade execution in equities markets. Fixed-income quotes, on the other hand, are usually just estimates rather than definite promises. Even while trades cannot be automatically completed on the same platforms, electronic broadcast of quotations to at least some participants often helps fixed-income trading.
Participation in Bond Trading and Logistics
Institutions such as pension funds, mutual funds, hedge funds, insurance companies, and sovereign wealth funds dominate trading activity in the secondary market for fixed-income instruments. Such institutions have access to quotation data. Investment-grade bonds are valued as a spread over a Treasury product with a comparable maturity. In the interdealer market, dealer businesses trade with one another either directly or through interdealer broker (IDB) platforms, some of which enable fully electronic trading as well as over-the-phone trading via voice-assisted brokers.
Estimating trading costs in bond markets is difficult for a variety of reasons. Dealers do not post firm bids and ask quotes, with the exception of Treasury securities, and other indicators of trading activity, such as indicative quotes and limit orders, are not generally distributed and may not be available to researchers. This means that standard equity market indicators like quoted spreads (the difference between the bid and ask quote).
