Radical Guide to Online Bond Investing: 4 Things You Want to Trade Bonds Online

We take for granted the main point of this discussion: Your broker should be connected to a good multidealer marketplace.  That has to be a given, from which all the benefits to you as an online bond investor flow. 

Once your broker is connected (and private labelling), you will receive the benefits of the marketplace.  The broker’s website will light up with trading features specific to online bond trading. 

We assume that your online bond screens support the functions that follow.  Here are 4 tips to improve your online bond trades:

  • Use quote requests.  You should always check price levels on your bonds before trading.  You do the checking with the bid and offer quote request feature.  So, for instance, through the “bid quote wanted” function, you are asking the dealers in the marketplace to provide a bid level on your bond. 

Alternatively, for any specific bond not seen on the inventory screens, you can ask for an “offer quote wanted”.  In this case the dealers will look for that bond with a view toward making an offer to you. 

One side note:  Don’t abuse this function too much.  Dealers will tire of chasing down quote requests, especially from customers who don’t trade on the quote indications provided by them.

  • Place limit orders.  A very nice touch, very equities -like. Because large credit or market moving events are rare, limit prices are rarely filled.  Outside of Treasuries and U.S. agency bonds, the retail bond markets do not exhibit large intraday price swings.

However, the smarter dealers see your limit order, and they will know --- right then and there --- what your price is.  They may even cut their spread to get it filled.  They may negotiate with you, if you’re a prized customer.  Limits are worth using to express your reservation price to the dealers.

  • Study bond descriptions.  The bond market is nothing if not rich in information.  To protect themselves, most online brokers will give you information in droves --- call dates, maturity dates, coupon changes and resets, ratings, all are important.  The more information, the better it is for you to make an informed decision. 

Be mindful of one small, but relevant, point.  All brokers of all stripes will disclaim any ownership of the description information. 

Usually it will be said that the information “relied upon” comes from “third-party sources,” such as any of the three major rating agencies or information services like FT Interactive Data. If you trade on incorrect information from these sources, the broker is not obligated to fix the trade…. So doublecheck the information, whenever possible.

  • Consider buying new issue corporate bonds.  Most reputable online bond brokers have access to two new issue programs --- Direct Access Notes (“DANs”) and InterNotes.  Both programs bring good name, investment-grade issuers to the retail investor.    Because of the fixed-price nature of the programs, it is a way to buy a bond with the current market yield cheaper than in the open market. 

Before, in the not-so-distant past, you were held captive to one inventory.  Now because you trade online, you can access multiple dealer inventories.  That access alone means a cost improvement; it means progress in the retail bond markets.

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June 3, 2005 | Permalink

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