Welcome to the latest episode of At the Forefront: Fintech Conversations!
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In this special roundtable episode, Forefront VP & Head of Content Sam Belden sits down with Jonathan Birnbaum, Founder and CEO of bond trading ATS OpenYield, Marty Mannion, Managing Director and Co-Head of TD Securities and Barnet Sherman, Finance professor at Boston University and Forbes contributor, for a deep dive on innovation in the bond market. The panelists discuss how forces like automation and AI are lowering investment costs and barriers to access in an asset class ripe for disruption.
First, Sam asks the panelists to provide their high-level perspectives on the bond market today, which invoked optimistic sentiments. Barnet cited how interest rate increases have sparked investor interest in the fixed income space, with Marty sighting efficient pricing models as critical for market makers. Jon stated that fixed income is in the midst of a transformation that will ultimately affect how bonds are distributed across the investment landscape, driven by renewed attention and demand.
From the liquidity provider perspective, Marty describes regulatory change as a catalyst for bond market efficiency. He draws parallels between fixed income in 2024 and the equity asset class in the late 90s, when forced vendor connectivity and other regulatory shifts resulted in great outcomes for retail investors. However, this time period also upended models for market makers, who now needed a massive investment in their technology to compensate for the decline in bid-ask spreads. A similar investment must be made by today’s liquidity providers to take advantage of the rapid innovation occurring in the bond market today.
Offering the retail investor point of view, Jon describes OpenYield’s mission to bring the bond transaction experience into parity with other asset classes. It’s a major development for market makers, like TD, a market maker on OpenYield’s marketplace, to be able to automatically put forth quotes for small size tickets with no human capital required. The downstream effect is a market that looks and feels more equity-like, where participants can interact on the marketplace using limit and market orders and trading smaller units with low costs.
Next, Barnet recaps some of his recent reporting on AI’s impact in the municipal bond market. He explains how generative AI allows end users to use natural language to interact with complex data sets and generate user interfaces on the fly. AI’s ability to homogenize large data batches enables strong algorithms and stronger predictive analytics that will move the market forward in the next 1-2 years, he states. Jon and Marty also speak to the impact of increased digitization of information and data; as automated trading systems gain traction; they will have an unambiguous improvement for the individual investor. Jon states that as the market becomes more electronic, new participants will be pulled into the asset class, increasing competition and driving down costs.
The group also discusses changes in investor behavior and demographics as accessibility to the bond market has increased. Jon speaks to increased international interest in treasuries and investment grade markets from APAC and LatAm, and Marty highlights the “unbelievable” growth of separately managed accounts, which offer customization that enables retail investors to diversify. Barnet highlights the wealth transition from Baby Boomers to GenX-ers and upcoming generations, which is spiking up interest in ETF and index funds. Many younger investors want to put their muni money to work in the form of indices, and also have an increased interest in making societally impactful investments that make a positive difference in both their banks accounts and their wider communities.
Lastly, each of our panelists provides a prediction on the future of the fixed income market. Barnet stated that AI will continue to rapidly empower automation and accessibility of the asset class, and Jon predicted that tech around direct indexing and their equivalents in the bond space, where products were previously rudimentary, will see further sophistication. Legacy trades, MSRB reporting fees and small lots need to be rethought, and having conversations with regulators will be crucial. Marty foresees munis catching up to credit, as well as fungibility across products and asset classes, which will lead to the construction of portfolios of various fixed income and equity products. With more flexibility and investor education, we’ll soon see more interconnected investment profiles, as opposed to bifurcated sleeves of investment portfolios.
See below for a breakdown of what was discussed. Happy listening!
Timestamps:
2:00 – High-level thoughts on the current state of the fixed income space
5:30 – Emergence of liquidity provider automation
9:40 – Main benefits that retail investors may realize from market innovation
13 :45 – How innovation in AI is transforming the muni market
25:35 – How investor behavior is changing in response to bond market innovation
35:35 – Predictions on the future of the bond market
