What is an 'Active Bond'

An active bond is a corporate bond or other fixed-income security that is frequently traded at large volumes on the New York Stock Exchange (NYSE). This is not to be confused with actively managed bond investment strategies.

BREAKING DOWN 'Active Bond'

Active bonds are traded by active bond crowds, which are traders who buy and sell bonds that are frequently traded. Active bond orders are typically filled quickly due to the presence of higher demand from investors, and they generally have lower bid-ask spreads. Because of the higher liquidity of active bonds, active bond traders are usually better able to dictate prices.

This is different than infrequently traded bonds, which are traded by the inactive bond crowd. An inactive bond crowd is a group of exchange members who buys and sells bonds that are infrequently traded. Limit orders placed by the inactive bond crowd may take a longer period of time to fill due to the absence of frequent trading. The inactive bond crowd is also known as the cabinet crowd. Before electronic trading, orders placed by those in the inactive bond crowd were stored in cabinets off to the side of the general trading floor. This gave rise to the cabinet crowd nickname.

All else being equal, larger trades generally cost less than smaller trades; small institutions pay more to trade than large institutions; and small bond dealers tend to charge more than larger dealers.

Why Invest in Active Bonds?

Active bonds can be an appealing choice for some investors because, as fixed-income securities, the price of the bonds is generally unaffected by their high trade volume. Also, active bonds often have higher ratings from agencies such as Standard & Poor’s and Moody’s. Taking these features together, investors often use active bonds for portfolio diversification or as a relatively safe investment during periods of market volatility.

Analyzing Active Bond Trade Frequency

Many financial publications publish a daily chart that shows the 10 most actively traded securities, based on the total par value traded, in each of the corporate bond market’s three sectors: investment grade, high-yield and convertibles. Investors can use this data to compare the market value of the corporate bonds they own or are considering to purchase. As noted by the Securities Industry and Financial Markets Association (SIFMA), higher trade volumes for a specific security often means higher liquidity, better order execution and a more active market for connecting a buyer and seller. The day’s most actively traded corporate bonds also may reveal where bond investors see the greatest opportunities and risks in terms of industries and issuers.

RELATED TERMS
  1. Bond Crowd

    The bond crowd describes bond traders on an exchange floor.
  2. Cabinet Crowd

    A cabinet crowd refers to the small group of NYSE members who ...
  3. Bond Yield

    Bond yield is the amount of return an investor will realize on ...
  4. Corporate Bond

    A corporate bond is a debt security issued by a corporation and ...
  5. Put Bond

    A put bond is a bond that allows the bondholder to force the ...
  6. Automated Bond System - ABS

    The Automated Bond System (ABS) was an early electronic bond-trading ...
Related Articles
  1. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  2. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  3. Investing

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  4. Investing

    Bond Funds Boost Income, Reduce Risk

    Bond funds can provide stable returns for those who depend on their investment income.
  5. Investing

    Why Bond Prices Fall When Interest Rates Rise

    Never invest in something you don’t understand. Bonds are no exception.
  6. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  7. Investing

    Find the Right Bond at the Right Time

    Learn about the types of bonds you should consider investing in, when you should be buying them and how to compare yields against their time to maturity.
  8. Retirement

    How to Pick the Right Bonds For Your IRA

    Learn about the best types of bonds to include in an IRA depending on an investor's risk tolerance. Understand the tax benefits of holding bonds in an IRA.
RELATED FAQS
  1. How a bond's face value differs from its price

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center