Nasdaq Ventures into Electronic Bond Trading

Brian Hicks

Updated April 3, 2013

Given the prominence the Nasdaq Stock Exchange holds not only in the United States but throughout the entire global economy, it should come as no surprise that parent company Nasdaq OMX Group (NASDAQ: NDAQ) is making a move that will surely shake up the methods by which bonds are traded.

According to Bloomberg, Nasdaq OMX Group has committed to buying an electronic bond trading system called eSpeed from BGC Partners Inc. (NASDAQ: BGCP) to the tune of $750 million. Already the second-largest stock market in the U.S., Nasdaq is likely to gain an edge from the acquisition, considering the fact that this will help the company corner the “fixed income” market.

This marks an entirely new approach to trading bonds, something that could potentially do a great deal of good for Nasdaq. In the past, bonds have typically been traded through over-the-counter methods, something that Nasdaq is hoping will change now that it will be handling the eSpeed platform.

stock exchangeeSpeed allows users to trade bonds via an electronic platform. Nasdaq officials believe that since bond trading functions in many similar ways to the trading of stocks, the acquisition will run rather smoothly and traders will find the new system far superior to trading on an over-the-counter basis.

BGC Partners Inc. has benefited quite a bit from the transition. Shares rose 37% on April 1st, something that comes as a massive shock to a company that has seen steady decline in its stocks in recent years.

BGC Partners stands to gain a great deal of ground from the transition, not only financially but also in terms of the company’s reputation. While the eSpeed platform will be in the hands of Nasdaq when the deal is finally completed, BGC will still be keeping its hands in the industry.

Nasdaq Faces Credit Rating Downgrade

Not everything is perfect for Nasdaq as a result of this decision, however. According to Bloomberg, Moody’s investor Service will likely cut its credit rating on Nasdaq, which could potentially have some negative effects for the stock exchange.

As far as Nasdaq is concerned, however, the difference in credit rating is not likely to have a major impact on the company at all, considering that rivals such as CME Group Inc. (NASDAQ: CME) would be far more likely to find dramatic issues if they were to get hit with such a credit rating downgrade.

The major reason Nasdaq believes it will prevail in the end, even if Moody’s decides to drop its credit rating, comes down to the dramatically new platform eSpeed provides to traders. According to the New York Times, Nasdaq is resting on the beliefs that eSpeed will not only have a major impact on how bonds are traded, but will invariably help to move the stock market itself in a forward direction.

After all, since bonds are traded in very similar ways to stocks, the differences between the two will likely be broken down, and Nasdaq will benefit in a variety of different ways. The company certainly has hopes for growth, even though the deal has not even been finalized as of yet.

Nasdaq hopes to finalize this deal by the end of the year. While it is too soon at the moment to tell whether or not the acquisition of eSpeed will truly make the impact the company expects, it wouldn’t be out of line to think that such a massive change could occur.

As electronic trading becomes more and more popular, it stands to reason why bond trading would take such a direction. Whether or not Nasdaq benefits from this acquisition and is able to beat a lowered credit rating from Moody’s will depend heavily upon how the company goes about planning the infrastructure of this system.

There is an appetite out there for those who are looking to trade electronically. This is no longer a world where physical trades make sense, especially given the fact that electronic trading can be done from one’s living room.

While this will, of course, have a major impact on the trading industry in general, most believe that it will have a positive effect for Nasdaq and its competitors. The more time passes, the more clear it will become as to whether or not this will truly pan out.


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