Anatomy of a bond trade – here’s how to build a fixed income portfolio on the Australian Bond Exchange
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The ABX launched with a plan to democratise the bond market, and it now turns over $9bn of fixed income trades per year.
Since 2016, the Australian Bond Exchange has facilitated access to fixed income investments for retail investors – and created a multi-billion dollar market in the process.
With turnover of well over $9 billion in FY21, the Australian Bond Exchange has found strong demand and is now preparing to list on the ASX later this year.
Speaking with Stockhead recently, CEO Bradley McCosker detailed how the business came to build a dominant position in the Australian market.
And for retail investors looking for fixed income exposure, here’s how the platform works:
Corporate bond trading in Australia is an ~$825bn market, ABX says, and the exchange provides a number of different options for investors to get access.
“The simplest way to think of the exchange is through separate revenue lines, each of which offer different access points depending on the client,” McCosker said.
The first is as a platform for the wholesale bond market. Secondly, just like a traditional stockbroking firm, ABX provides bond broking services – a business that’s “grown substantially in the last couple of years”, he added.
The ABX platform’s direct functionality with IRESS means retail investors can get access through their broker.
But “the most attractive part of retail is the online B2C (business-to-consumer) platform,” McCosker said.
The direct-access functionality is a result of the ABX executive team’s strategic decision to build out its own transaction and settlement platform, rather than relying on third parties.
“In practice, it’s effectively online broking for the OTC (over-the-counter) bond market specifically built for the mum and dad investor,” McCosker said.
“It’s the first one of its kind, and it allows retail investors to log on and buy and sell bonds – just as they would a listed equity.”
Of the $9.3bn in turnover that ABX generated in FY21, most of it was in the wholesale bond market.
And due to its rapid growth, the platform is now regarded by many in the industry as the largest bond trading house in Australia’s regional time zone.
“In many ways, we’ve already outgrown Australia, so what our position in the wholesale market does is it gives us great price discovery for retail investors who use the transaction engine.”
In that context, ABX is at the forefront of a notable investment trend among Baby Boomers — Australia’s largest demographic – who are looking to de-risk their portfolio away from equities, while still enjoying a return that’s above what they get from term deposits in a low interest rate environment.
Through the ABX service, they now have simplified access to a mix of investment-grade bond issues from Australia’s largest companies, as well as high-yield debt instruments.
“The underlying premise is to allow everybody access to these assets,” McCosker said.
“The only limiting factor is the face value of the bond, so a given bond investment might be as low as $1,000”
From an operational point of view, ABX has removed those historic barriers to entry to give mum and dad investors access to “something they should have had years ago,” McCosker said.
And from a behavioural point of view, the size of investments between retail and sophisticated investors isn’t as large as one might think, he added.
“Our average transaction size per customer is around $60-$70,000,” McCosker said.
“And that took me by surprise — I thought it would’ve been a lot less.”
That compares to an average trade on the ASX, which is more like $4,000, he said.
“We offer bond investments at smaller sizes but we’re finding people typically buy bigger chunks. We don’t push them to do that but behaviourally that’s what they are choosing to do,” he said.
“So in terms of the size between wholesale and retail clients — they’re within 10% of each other.”
This article was developed in collaboration with Australian Bond Exchange, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.