Radical Guide to Online Bond Investing: Make Sure Your Online Bond Broker Is Connected

Your online bond broker should be participating in one or the other of the online marketplaces. When we say that, we mean something very specific:  Your broker should be allowing you direct access to the online bond marketplace, where dealers trade for you.

You’re trading with many dealers --- the beauty, logic and cost savings of multiple inventories comes back to you.  You may think all the bond products are from your broker, but they are not.  That is Broker XYZ has “private labelled” its trading website so all signs and hints of the multidealer marketplace are erased.

The better retail dealers have signed on to these multidealer marketplaces -- where the two best are ValuBond and BondDesk.  Similar in degree, they offer trading screens, analytics, queries, quote requests, communications between dealers and customers, and search routines.  They have defined a robust trading environment for the retail bond investor.

Here’s how it works.  As a customer of Broker XYZ, you will see and be able to do the following:

  • You express your interest in buying or selling product (offers or bids wanted) to the dealers.  When you are buying, dealers search for bond product among various inventories, whether their own or others.  (Such dealer searches are increasingly executed through electronic trade blotters connected to Bloomberg, for instance).  Alternatively, when you are selling, interested dealers will bid on your bonds for their inventory.
  • You communicate directly with the dealers in the marketplace.  The dealers will come back with indications, quote updates, times to fill and the availability of bonds in updates to you.   
  • Should you trade, the dealer will settle with your broker, not with you.  Because Broker XYZ owns the relationship with you and carries your account, the bonds will be settled between Broker XYZ and the dealer.  In other words, Broker XYZ is taking both customer and settlement risk on the trade, for which it is compensated (see next).
  • Who gets what in the online bond trade?  Every time you trade a bond, you will be paying a spread to both Broker XYZ and to the dealer counterpart in the marketplace.  When totaled, all the spreads will be hidden in the net price to you.  (In its disclosed pricing policy, Fidelity is like Broker XYZ but is, instead, charging a flat and disclosed ticket charge, not a hidden spread).

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June 3, 2005 | Permalink

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