Whether you know it or not, you probably own corporate bonds in your 401K or other retirement accounts. But this $8 trillion market has failed to take advantage of technology that’s revolutionized stock-market trading and reduced costs for investors.
In fact, most bond trading is still done over the phone.
One finance professional trying to bring corporate bond trading into the future is Amar Kuchinad, CEO of Electronifie, an electronic trading platform that has executed about $2 billion in trades since May 2015.
Kuchinad wants to win over bond traders who have become comfortable with traditional and arguably outdated trading methods like the telephone.
These outdated methods can lead to an inefficient market that translates to higher costs for retail investors through their holdings with asset managers and pension funds, according to according to Kuchinad, who formerly worked as a fixed-income trader at Goldman Sachs.
“It’s a combination of regulatory tailwinds, and creating a product that really fits the workflow of the users,” he said, “so that to them, the difference between calling someone on the phone and clicking a mouse is as minimal as possible, and showing the value we’re able to have.”
Electronifie aims to target large transactions of $5 million to $50 million or more, which Kuchinad says account for about 50% of investment-grade transactions in dollars.
And Kuchinad said he can succeed where others that have tried to innovate in this space, like Bondcube, have failed.
“From a very early part of our company, we worked iteratively with the customer base,” he said. “We created a product that really we had traders design for us. We did the coding and the development work on the software side. So from our standpoint, we custom-built a product that fits traders needs and that definitely sets us apart from a lot of the competition.”
To be sure, Kuchinad added, he initially got some push-back from banks. But they have now recognized the shift to electronic trading in this market will be a secular change — and not just cyclical.
“We’re very well supported by some of the largest asset managers in the US who want to see platforms like this succeed,” he said.
Mutual fund holdings of corporate bonds have nearly doubled since the crisis as more and more money has come into this sector, according to Kuchinad.
“Partly that’s demographic changes as more baby boomers are in retirement age and are saving as opposed to looking for growth,” he said. “You’re also seeing more risk aversion away from equities especially in the 2009 to 2011 time frame. And with rates so low, there’s very limited amounts of assets that really provide a yield for savers and corporate bonds are one of those — a lot of money has flowed in for that reason.”
Meanwhile, inventory at banks has gone down. Since the 2008 financial crisis, changes in bank capital requirements have made it more difficult for banks to hold large amounts of debt.
“When I was at my last employer, our role as an intermediary and provider of immediate capital was getting diminished by all the regulations getting imposed,” Kuchinad said. “Ninety percent of the inventory that banks used to hold — of the risk appetite that they had to provide to customers — has been dissipated off their balance sheets.”
He added: “And with zero rate environment and the extra amount of capital they have to hold, it’s not profitable for them to provide that immediate liquidity. We designed Electronifie to step into that gap.”
While Electronifie is still small, Kuchinad says he wants to become the replacement for the dealers that have retrenched from the marketplace.