ABX has opened up Australia’s bond market for retail investors – and now it’s eyeing the ASX
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The level of demand for an integrated, industry-regulated bond trading platform has surprised even the ABX executive team, CEO Bradley McCosker says.
A new exchange is eyeing the ASX – but this one caters to the bond market, not stocks.
Launched in 2016, the Australian Bond Exchange (ABX) has built a major new addressable market in one of Australia’s core asset classes.
And speaking with Stockhead recently, ABX managing director Bradley McCosker provided some interesting commentary on where the company saw an opportunity to add value in the Australian market- by providing simple access to bond investments.
McCosker co-founded ABX following a 25-year career in investment banking, where he rose to head of client coverage group for the Americas at Deutsche Bank in New York.
Returning to Australia 2010, McCosker consulted for APRA and formulated many of the OTC (over-the-counter) clearing rules for as Senior Manager of risk policy at the ASX.
“When I came back to Australia, I found that fixed income products I was buying and selling in the OTC market, my parents and people just like them couldn’t buy or sell here,” he said.
“Instead, you had to invest in a fund which charges you middle-man fees instead of being able to buy the product directly.”
That marked the catalyst to develop an exchange in Australia that provided simplified access to OTC corporate bond markets for a wider remit of investors.
Following a multi-year period of development, ABX took a key step forward in 2020 when it joined forces with integrated financial software firm IRESS.
Around 90% of orders in Australia get routed through an IRESS platform, McCosker said, and “they treat us like any other exchange. So it’s just as easy for a broker to buy bonds from us as it is to buy shares on the ASX.”
In that context, a key strategic initiative from the management team was to build out its own trading and settlement system, rather than outsourcing it.
“It took about three years to build that out, and the final completion of the integration (with IRESS) was in the middle of last year,” McCosker said.
“We’ve effectively created our own asset sub register for OTC products, similar to what CHESS (the ASX’s clearing system) was intended to do – execute settlement with an asset register and seamless transfer between counterparties.”
“Our system’s functionality means investors don’t have to wait for clearing and settlement — we can settle trades immediately. That gets rid of a lot of settlement risk and credit default risk.”
By establishing an efficient and regulated bond market mechanism, ABX has facilitated multiple demand pathways that were previously blocked by a lack of infrastructure.
ABX provides direct access to Australia’s OTC bond market – the home of the big end of town where large financial institutions raise and invest millions of dollars.
By doing so, the platform is meeting demand from private investors who were previously locked out of that market due to the minimum trade size.
ABX clients can now make bond investments at OTC prices without the middle-man mark-ups, for as little as $10,000.
And by creating a new market pathway, the company has also created plenty of demand.
The Australian Bond Exchange generated turnover of more than $5bn in 2020, with even stronger growth in FY2021 surpassing $9.3 billion for the year.
“Our retention rates are really high and we’re finding the frequency of repurchase is quite big too,” McCosker said.
“What that’s confirmed for us is that there is a lot of demand there, particularly as the Baby Boomer demographic gets older. They can’t afford market shocks and they need a steady income stream.”
ABX’s leading position in the wholesale bond market also creates a positive feedback loop which results in “great price discovery for mums and dad investors,” McCosker said.
“We’re already a significant bond trading house in this time-zone, so in some ways we’ve outgrown Australia,” he added.
“If you’d have told me five years ago if we’d be turning over billions of dollars a year, I never would have believed it.”
With plenty of operational momentum, ABX is now eyeing a run at the ASX boards as it consolidates its position as Australia’s leading bond market exchange.
Discussing the rationale for an ASX move, McCosker highlighted that ABX already operates as an unlisted public company in a highly regulated industry.
“The gap between what we have to do from a compliance perspective is small, so it’s not an onerous change compared to what some companies face,” he said.
“So not much will change but what it allows us to do is access capital markets faster and increase our shareholder base. And the money we raise will go into client acquisition because the software’s built – it’s not about funding to build the infrastructure.”
In that context, the group’s plan for an ASX listing aligns with its strategy to capitalise on the market opportunity it’s now created.
“It’s a first mover advantage because we’ve redesigned the process,” McCosker said.
“When you break down barriers to entry to people and you have a large market share, the upside potential is huge. And in the meantime, we can provide a platform for clients to build a stronger fixed income portfolio than what they currently may have.”
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.