Radical Guide to Online Bond Investing: The Costs of Online Trading

Joseph Schumpeter, the great Austrian economist, once wrote this about small-scale retail shops (in our guide, retail bond dealers):  “He (the small retail dealer) can never adapt himself to the methods of his competitors who can afford to sell at the price at which he buys.”   

As true as Schumpeter’s words are for online equities trading commissions, his words are becoming more true for online bond trading.  Competitive, online trading will place cost structures under the spotlight.  Customer trades will tend to flow to the lower-cost bond provider --- namely, the dealer with the lowest inventory or search costs.

A recent study by Forbes could not say --- with any definitive statement --- which dealer is the cheapest on any bond product.  In the nature of over-the-counter dealer markets, it is impossible to reach conclusions on best pricing.  But generally, benefits to the customer from online trading are:

  • In the online multidealer marketplace, retail dealers reduce spreads to remain competitive.
  • Online bond trading has opened up poorly traded markets (mainly, below-investment-grade bond markets) to more trade flow and competition.
  • Online bond trading creates an accessible audit trail.  A small point?  With this trail, dealers understand that verifiable market quotes matter.   They have to  put their best quotes forward; the SEC and NASD are watching the tape.

These retail platforms are now a fact in the retail bond market --- delivering real savings benefits to the retail investor.

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June 3, 2005 | Permalink

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