The NYSE is preparing to launch NYSE Bonds, a trade-matching platform created to emulate trading on an equities exchange rather than the request-for-quote model familiar to the fixed-income market. John Holman, VP of Fixed Income, NYSE Group, notes that the initial focus is corporate bonds, but he is considering expanding the system to include Treasuries, munis, credit default swaps and convertible securities down the road.

NYSE Bonds will replace the existing Automated Bond System (ABS), which dates back to 1977, and was underutilized both because of its outdated technology and its limited inventory, noted Holman in a previous interview with Advanced Trading.

The new bond system will launch on Monday starting with the 820 CUSIPS [9-digit identifiers given to bonds] that are now trading in ABS. “The ABS system will be shut off on Friday, and we’ll turn on the new system Monday,” says Holman. He notes that the system has been in testing for months.

The plan over the next two months is to roll out tranches of 500 additional CUSIPS until the system reaches approximately 4,000 of the more-liquid corporate bonds. “At that point, we’ll decide if we want to move into the less-liquid CUSIPS,” Holman says.

When asked how receptive the market has been to the new trade-matching model, Homan, says, “It’s not a group hug out there, but the reception is better than it was two years ago” when Holman began planning the system.

At first, he says, when he talked about the system, people were practically throwing vegetables at him, but now the market is more receptive to it. “They see the adoption in the Treasuries market — which went from 10 percent electronic in the early 90s to more than 70 percent today — which helped traders move out of the denial stage."

In addition, TRACE (Trade Reporting and Compliance Engine) offered by the NASD has made pricing data easier to obtain and will help with the adoption of electronic trading in the fixed-income markets. “TRACE has helped with transparency, and more dealers are cognizant that they have to not only be in the relationship game, but also in the distribution business," he says, explaining that liquidity providers are understanding that they need to participate in electronic venues.

Holman points out that NYSE Bonds is neutral (owned by an exchange), anonymous (you don’t know who your counterparty is), and firm and executable (these are not indications of interest being sent; they are executable orders).

The big-picture goal is to create a centralized marketplace for all fixed-income products, Holman says. And the even bigger-picture goal is to create an exchange that offers all products — equities, bonds, options — a one-stop shop for traders and listing corporations. Traders will be able to execute multi legs of a derivative transaction if they have the algorithms to do so — via the NYSE Group, and listing corporations could list the entire balance sheet of their securities with the NYSE Group.

The technology being deployed was developed by Kestrel Technologies. Holman explains that Kestrel was chosen because NYSE wanted an open system that was a “low lift” on the technology side, and modular where components could be added easily as the needs of the market evolved. Users — which include hedge funds, broker-dealers, traditional asset managers and middle-market firms — can use NYSE Bonds by simply having a password and login set up.

What to expect on Monday? “Not a lot,” notes Holman. “The first week will involve moving out the current bonds from ABS — putting open orders from the old system into the new system and working out any technology quirks.” In about a month, once many of the more-liquid bonds are rolled out, things will start to take hold.