Fintech’s Reach Into Bond Markets Promises More Transparency and Efficiency

Financial technology reaches into many aspects of capital markets, including bond origination – an area that has long resisted change. But while a move toward more digital bond markets may take some getting used to, it promises to provide price transparency, efficiency and help inject liquidity into the world of fixed-income.

Financial technology has changed the way people invest, pay bills and even order coffee, but it has now moved into an area that’s typically been all about personal interactions and relationships: the bond market.

While fintech has traditionally been associated with retail banking or stock trading platforms, its reach is growing, in part because of the convenience and efficiency it creates, as well as because it promises to improve access, education and transparency.

“Issuers traditionally had to really rely on the same fleet of institutional investors who always bought their bonds and there wasn’t really an efficient way for them to canvass a larger number of investors in the marketplace,” said Vuk Magdelinic, chief executive of Overbond, a Toronto-based fintech start-up.

“Dealers that were servicing them only went to the biggest guys who they had the strongest relationships with.”

Magdelinic’s company is trying to change that by bringing the issuance of new bonds online. Overbond works to help issuers issue those bonds, and is focused on the institutional primary bond market, where an average ticket size is around $50 million

The goal, he says, is to induce deal flow by helping bring together corporate and government issuers, dealers and institutional investors on an online, cloud-based platform where they can foster new relationships and create more transparency around price.

“You need to benchmark off of the secondary market the similar bond that has traded (but if) the market is so illiquid there’s no similar bond that traded recently, it makes it very hard to benchmark,” Magdelinic said.

“The confidence around the price is very low these days, and that’s not conducive for more deals to happen.”

Bond origination is a later entrant to the fintech space because up until recently, the technology just wasn’t there to support the ideas behind platforms like Overbond.

Given that each bond acts as its own kind of security and that bond trading is often seen as more of an individual, relationship-driven activity than stock trading, there hasn’t been much interest from any one party within the industry to change the way things were done.

As technology evolved, Overbond was able to offer data and predictive analytics to a network of fixed income participants, and allow investors to express interest on potential new bond issues.

“It’s inducing investors to really express interest to issuers so that price discovery can happen in the market,” Magdelinic said.

Capital markets experts have said they welcome tools that bring more transparency to fixed-income markets and make them more efficient, but that convincing participants that their process needs updating may prove challenging.

To Magdelinic, however, convincing key players to move into the digital sphere is part of the process, given that the push toward fintech isn’t something that’s likely to go away anytime soon.

“It is about users and interaction between a digital investment banker and an investment banker who is still establishing strong relationships with clients directly,” he said.

“With technology, over the course of the last 20 years, we’ve seen that from more manual, face-to-face (interactions) we’ve moved to phones, emails and now even electronic roadshow capabilities – we’re evolving, and our relationships are evolving as well.”

4 years ago