Equity exchanges are excitable. There's a new adventure every week, whether it's NYSE (NYSE:NYX) bidding for Euronext or Nasdaq (NASDAQ:NDAQ) chewing on a chunk of the London Stock Exchange. Bond life is a lot less exciting. But as equity markets stutter, a big opportunity appears for boutique bond exchange MarketAxess (NASDAQ:MKTX). Can it grow beyond a boutique, and become The Archipelago of Bonds?

Bonds as an asset class are back. Interest rates are rising, and there's more value in taking corporate credit risk, as credit spreads -- the difference between corporate bonds and risk-free U.S. Treasuries -- rise. The U.S. bond markets are huge -- a total of $25 trillion outstanding, compared to a total value of $14 trillion for all the stocks in the Russell 3000. The corporate bond market alone is worth around $5 trillion.

Yet most bond trading remains antique and opaque. Some bonds trade in central locations, such as the New York Stock Exchange and American Stock Exchange, but in small volumes. Typically, trades are made privately, by phone, between big investment banks and investors. MarketAxess is working to automate this manual process -- currently, less than 20% of corporate bond trading is electronic. Published, public prices only came in 2002, when NASD introduced its Trade Reporting and Compliance Engine (TRACE system). And the corporate bond prices you see in the Wall Street Journal are from MarketAxess.

How to analyze any exchange
All securities exchanges -- whether equity, bond, or commodities -- serve similar functions, so you can analyze them the same way.

The first, and most important, test of an exchange is its pool of liquidity. The best place to trade a security is where there are the most buyers and sellers. Liquidity drives both trading revenues and publishing fees for market data. MarketAxess sits between 25 major bond dealers and 650 institutional customers, so it passes this test.

The second test is the type and breadth of securities traded. As a securities trader, you earn higher spreads (spreads are the difference between the buy and sell price) on thinly traded securities. MarketAxess focuses on hard-to-trade, higher-margin corporate debt. It is expanding into high-yield debt and the sizzling credit derivatives market. TradeWeb, the main competitor in dealer-to-investor trading, focuses on trading more liquid debt products, such as U.S. Treasuries, where 60% to 70% of trading is already electronic.

A third test is the quality of the trading technology. It should be easy to use, reduce the cost of trading, and integrate smoothly with other systems. MarketAxess has spent more than $100 million on its technology platform, and invests more each quarter. Another pass.

Fourth is how well the business punches out the returns of the exchange model. With human-free trading and processing, each additional trade at MarketAxess has near-zero marginal cost. The London Stock Exchange has operating margins of 35%, the Chicago Mercantile Exchange (NYSE:CME) 57%. MarketAxess is fully automated, has a large liquidity pool, and neat trading technology, yet operating margins are only 10%. Here, the company may have missed something in the syllabus.

Don't skip your governance homework
Finally, there is governance -- maybe MarketAxess didn't study it enough. Often, there are challenges in transitioning from a business utility model, organized for the benefit of its founder-operators, to a public company, run for its shareholders. NYSE is a prominent example. MarketAxess earns 46% of its revenues from customers who are also shareholders, such as JPMorgan Chase (NYSE:JPM) and Lehman Brothers, which creates a challenge. It's hard to charge your customers full freight when they are also your main shareholders. At a recent investor presentation, MarketAxess pointed out that on an investment-grade bond trade, dealers using the platform saved 1.7 basis points (a basis point is 100th of a percent) compared to the 0.2 basis points charged for the trade. Benefit and cost seem lopsided, especially when the average size of a trade exceeds $10 million. Founding firms are also overrepresented on the board, especially JPMorgan Chase.

It could be worse. Governance at eSpeed (NASDAQ:ESPD), which operates in the dealer-to-dealer market, makes little attempt to balance private and public shareholder interests. Investment bank Cantor Fitzgerald owns 88% of eSpeed's voting stock through supervoting B shares, and takes 35% of fees earned by eSpeed on electronic trades.

Archipelago: the sequel
To sum up, there is tremendous growth opportunity for the bond exchanges for two reasons. First, the market should return to the fixed-income asset class as investors' risk amnesia clears. Second, as more fixed incomes fall to electronic trading, volumes should skyrocket. The inventory of highly automated U.S. Treasuries turns over every eight days; the inventory of corporate bonds turns over once a year. MarketAxess has a good business and technology design, but governance needs to become more shareholder-oriented.

There may be further upside. As the NYSE moves away from domination by specialist interests, it could acquire MarketAxess. NYSE CEO John Thain has spoken publicly about creating a retail-oriented market for bonds. Investors would have access to real-time prices on company debt, and the ability to place orders online. The MarketAxess platform offers Archipelago-like electronic trading abilities in fixed income, available for less than a third of the near billion paid for Archipelago. Acquiring MarketAxess would make NYSE a true securities exchange, not just a stock exchange.

David Gardner recommended Archipelago more than a year ago to Motley Fool Rule Breakers subscribers. It returned nearly 150% before merging with the NYSE Group, which David continues to support. Click here to learn more about investing in Rule Breakers.

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eSpeed is a former Hidden Gems recommendation, while JPMorgan Chase is an Income Investor recommendation.

Fool contributor John Finneran is a consultant, investment analyst, and writer specializing in the financial value of technology. He does not own any of the shares mentioned.