Fixed Income Markets and Participants
Bond markets look nothing like equity markets structurally, and the differences shape how they trade.
Mostly over the counter
Most bonds do not trade on an exchange. Trading happens through dealers who quote prices and hold inventory, typically via request-for-quote: a client asks several dealers for a price and trades with the best.
This has consequences worth knowing:
No consolidated tape. Price discovery is fragmented and less transparent than equities, though reporting requirements have improved this.
Liquidity is concentrated. A government has hundreds of outstanding bonds, and only a handful trade actively. The most recently issued at each maturity, the on-the-run, is far more liquid than older off-the-run bonds. The yield gap between them is a real and tradeable liquidity premium.
Dealer inventory matters. With dealers intermediating, their willingness to hold risk determines available liquidity. Post-crisis capital rules reduced dealer balance sheets, and market liquidity in stress is generally thinner as a result.
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