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For equities it's very simple, exchanges maintain an order book of the limit orders sent and the mid-price of the order book can be considered as the fair value of the stock.

For Fixed Income market I am really confused by the way it works since it is an OTC market. For example is there an order book where people can send buy/sell limit orders like the equity market? (for all Treasury off the run and on the run bonds?)

But if that's the case then who maintain the order book?

I am even more confused when I know some platform like TradeWeb and MarketAxes exists where people trade Bonds through Request for Quote. But in that case how can the people send quotes if there's not an order book that give the price/fair value of the instrument?

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You are correct that the fixed income market is largely an OTC market, where each of the dealers trading desks maintain their own order books for some of the sub sectors of the fixed income markets and will make a market in those bonds. The better capitalized dealers will hold inventory as part of their market making function.

If you are looking to trade, you must contact the broker/dealers directly to ask for bids or offers for the bond of interest on the size you are interested, and negotiate with them directly. You can reach out to the dealer via phone/email/Bloomberg or some other Execution Management System (EMS). TradeWeb and MarketAxess are examples of these EMSs. These days, Bloomberg and EMS are typically used as they facilitate the quoting and trading with the dealer community. The EMSs sign up broker/dealers, and other market participants to be on their execution management platform. Through these EMSs, one can Request for Quote (RFQ) several dealers/participants simultaneously, putting them in competition to get better prices and execution. The broker/dealers will quote (often electronically) and trade on these platforms, based on their order book and customer flow. Obviously, you can place an order to buy or sell a bond with these dealers directly and they will attempt to facilitate your order for the quantity and price you desire, either through their inventory or through working their client network.

The market has attempted to provide some transparency to this market by creating mandatory trade reporting mechanisms for eligible securities, such as the Trade Reporting and Compliance Engine (TRACE). Also, there is an effort underway to make some of these OTC instruments centrally cleared.

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  • $\begingroup$ That's very clear, thank you! So the only way people can Trade bonds is thruh Rfqs? And the TRACE mechanism is reported to these EMs or to an other entity? And in that case only the trade that occurs is reported or all the bid&asks that have been send during the Rfq? Thank you! $\endgroup$ Feb 26 at 14:03
  • $\begingroup$ Yes bonds trade by negotiation. Dealers will provide indicative and good prices on their own platforms and to the EMs or services to Bloomberg but their is no central exchange like equities. An EMs need not be involved and one can negotiate with a dealer directly. Not all bonds are TRACE eligible and I don't believe quotes are reported to trace. The TRACE trades are available to dealers as well so they can see where these bonds have traded. Also, there are brokers' brokers that intermediate between dealers. $\endgroup$
    – AlRacoon
    Feb 26 at 14:44
  • $\begingroup$ Ok I see thank you! Do you know where I can read more about that? Like is there a book or document that explained in great detaild how all of this work? $\endgroup$ Feb 26 at 15:00
  • $\begingroup$ Actually just discovered that BrokerTec exists where you have an order book and where you can trade on the run bonds, and then no negociations is needed? $\endgroup$ Feb 26 at 23:10

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