Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 1 - Trading Introduction
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 2 - Financial Products
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 3 - Economic Principles
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Bonds can generally trade anywhere in the world as long as there is a buyer and seller who can strike a deal, as such there is no central place or exchange where bonds trade, as there is with publicly traded stocks. The bond market is known as ‘over the counter’ rather than an exchange market. Some corporate bonds are listed on exchanges especially in the U.S. Bond futures, and certain types of bond options on the other hand are traded on exchanges, but the majority of bonds do not trade on exchanges.


Investors can trade marketable bonds amongst themselves but usually they are traded via bond dealers who generally work in major investment houses. It is not uncommon for dealers to ‘make a market’ as it is the job of the dealer to quote prices for buyers and sellers. The function of the dealer is to provide liquidity for bond investors, in turn allowing them to buy and sell efficiently without too much concession on price. Dealers are able to trade amongst themselves directly or anonymously via bond brokers and dealers also have bond traders located in major financial centres who are able to trade at anytime the market is open.


Financial institutions, pension funds, mutual funds, and governments are the major bond investors; along with the dealers they comprise what is called the ‘institutional market’, and this is where large blocks of bonds are traded. There is no size limit in the institutional market and it is not uncommon to see an order of $500 million+. For the smaller investor there is the retail market which like the former has no size restriction but a common trade would not exceed $1 million.


Bond futures work differently to those highlighted above as futures have specific rules and regulations, everything about a futures contract is standardised except its price, and futures contracts are traded at a futures exchange and only at a futures exchange; where its purpose is to facilitate trade.

One of the most important functions of a futures exchange is to provide a clearing operation. The Clearing House is responsible for clearing trades and for the day-to-day settlement. What does that mean? Well, the Clearing House records all the trades happening in the trading pits each day. At the end of the trading session, it matches or reconciles contracts bought and sold.

The Clearing House also settles the traders’ accounts to the market each day. When you buy or sell a futures contract, the exchange requires you to put up a performance bond. That’s a cash deposit to cover any loss your investment may incur. Money is added to your performance bond balance if your position earned a profit that day. However, if your position lost money that day, money is subtracted from the balance. And you may get a call to put more money into the account. The Clearing House figures that out.


Newly issued bonds are sold via the primary market, where bonds are directly available to investors, without intermediaries, or commission. In the primary market banks and brokers may buy large amounts of bonds at par, or face value, and then sell them to investors in the secondary market where bonds are bought and sold after they have been issued. Bonds will often change hands many times on the secondary market before maturity, and can be purchased at a discount, premium, or at par. Most bond trading occurs in the secondary market, yet when bonds change hands in the secondary market the issuer does not receive income on trades as it did in the primary market.

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