Exchange-traded products

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Of a financial instrument, meaning that it is, or at any rate can be, traded on a recognised exchange. Most commonly exchange-traded products are:

• Shares: The execution of transactions in listed shares happens on exchange; by way of settlement flit ephemerally across the exchange on their way from buyer’s broker to seller's broker, versus payment of the cash price but the transaction itself has no particular life outside that lonely journey.
• Exchange-traded derivatives: futures and options. These are trades that have a tenor, and while the execution of a transaction flits ephemerally across the exchange, ETDs also need to be margined and performed, and that process is called clearing, and is handled by a central counterparty clearing house.

To be compared with exchange-listed but not exchange-traded which is true of many bonds. Here they are “listed” on an exchange, but trading tends to take place in the secondary market, off-exchange.

Why aren’t debt securities traded on exchange?

Unlike shares which can trade on exchange, in organised trading facilities or over-the-counter, debt securities (bonds, notes, MTNs, certificates of deposit and so on) tend to trade only over-the-counter. They are not traded on exchange, and (while in bearer form) tend not to be traded in the secondary market nearly as often.

A given issuer tends to issue only one type of share (okay, maybe two - ordinary shares and preference shares). All of its ordinary shares are the same and are interchangeable (technically, they’re “fungible” with each other), meaning the same security is common across all venues in the market. That’s what gets listed, and it is (relatively) liquid.

By contrast, debt securitiess come in all kinds of shares and sizes. The same issuer might issue hundreds of different series with different economic characteristics, maturities and yields and features. Bonds of one series are not fungible with bonds of other series. Hence a given bond is generally far less liquid than an ordinary share of the same issuer. This, there are more issuers, and issues of bonds with different characteristics, which makes it difficult for bonds to be traded on exchanges. Another reason why bonds are traded over the counter is the difficulty in listing current prices.

See also

• Execution, clearing and settlement
• Listed, exchange-traded and over-the-counter transactions.