![]() ![]() Some bonds, like recently issued Treasuries, are easy to price too. The price of a share in AT& T can be arrived at instantly. Low transaction volumes make it difficult to price assets. Sellers in America pay a meaty 5-6% commission. Buyers and sellers must be painstakingly matched. But the big investments, managed by private-equity firms, are open only to institutions like pension funds or wealthy individuals. A slice of real-estate investment is offered to the masses, via listed trusts. “Some bonds are like museum pieces: they get put away in insurance companies’ portfolios, never to trade again,” says Richard Schiffman of MarketAxess, a trading platform.Īt the stickiest end is property. Even the most liquid of AT& T’s bonds only trades a few hundred times a day. Small-cap stocks-recent action in GameStop aside-tend to trade less frequently.īonds are stickier and dearer to trade. AT& T shares change hands 40m times a day (though some investors will hold for years, and high-frequency traders might hold for less than a second). Available figures suggest there are 5m-6m commercial buildings and more than 140m dwellings in America, each unique.įragmentation chills trading activity. All those marble fragments have been ground into sand. Now imagine the investor wants to buy property. And there are 300,000 distinct corporate bonds in America. There are 224 AT& T bonds alone: each pay different coupons, mature at different times and are worth different amounts. It is as if a single marble had been smashed into hundreds of pieces, each of them different. Now imagine they want to buy an AT& T bond. An investor buying a share in AT& T does not care which one they hold-it is as if they were picking from a set of identical marbles. This is largely the result of fragmentation. Yet bonds and buildings change hands in different ways. They are broadly comparable in size (see chart 2). To see why, compare the markets for bonds and property with equities. The process was so effective that the word commodity is now synonymous with standardisation.īut building a liquid market for an asset is not easy. Standardisation brought down the cost of moving and shopping for grains, making the market more efficient. ![]() So in 1848 the Chicago Board of Trade started classifying wheat by quality (1 the best, 5 the worst) and by type (red or white, soft or hard, winter or spring). But these silos also made it wasteful to store farmers’ grains separately. Then railways made it possible to move grains cheaply in silo cars. In 19th-century America buyers travelled from farm to farm testing wheat before striking a deal with a single farmer. “The internet made it possible to have your lawn sale on eBay.” GPS and smartphones made ride-sharing apps-which create thick markets for journeys-possible.Įxamples in financial markets abound. “The market for knick-knacks in the attic was once illiquid,” says Alvin Roth, a Nobel-prize-winning economist. Wherever you look, technology has helped create new, liquid markets. As happened with stocks, this will eventually empower individuals at the expense of established intermediaries. But the same forces that pushed down trading costs and drove up liquidity in the stockmarket are poised to disrupt all manner of assets, from corporate bonds to property, and even Picassos and classic cars. Outside stocks, fat fees and thin volumes still gum up markets, resulting in slow-motion transactions and deterring traders. Such innovations, possible thanks to advances in computing power and machine learning, have probably saved investors $1trn or more in fees since 1975. Now they compete with a range of vastly cheaper offerings: index funds that track the market exchange-traded funds ( ETFs), which offer access to baskets of assets and robo-advisers, which allocate cash among cheap funds according to portfolio-management theories. By January this year their share had risen to a quarter.Īs frictions were sanded down, powerful institutional investors that had padded their bottom lines by charging meaty fees for exposure to stocks saw the assets they control slip away. Retail investors made up a tenth of trading volumes in America in 2019. That, and the pandemic, which freed up time and provided stimulus cheques as starter funds, have spurred retail participation to new heights. In 2015 Robinhood, the online broker through which many GameStop trades would flow, was launched, becoming the first platform to charge users no fees at all. The more participants piled in, the quicker and cheaper it became to trade, in turn (see chart 1). Trading costs tumbled, and the quantity of shares traded ballooned. ![]()
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