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Subject:  Bond Brokers & Bond Desks Date:  7/19/2006  5:07 PM
Author:  imdajunkman Number:  17591 of 35623

Post 9/11, I bought 2-year and 3-year corps rather than follow Treasury yields down. Most will perform as expected. The bonds will mature, and I'll make the spreads I traded for. Sea Containers is a likely exception. The company is in trouble, and default is a possibility. My entry was an imprudent 101.600. But I paid the premium to obtain the 10 ¾ coupon. Monday, my broker breathlessly called, saying news was bad and asked if I wanted to get out. I did some quick DD, decided he had misread the market, and declined. (The fuller story was told in a prior post). The bonds weren't crashing. But I did have to ask myself, upon reflection, why I was holding them, now only three months from maturity. The traderly thing would be to take a loss on price, but lock in accrued interest, and move on. “Sunk costs” are nonsense and not a reason to hold a position. I saw them trading at 96, so I called him later, asking what price I could get.

He bemoans the fact that I didn't call him two hours earlier when he was putting together his afternoon's order. I asked him what price he got. He doesn't recall, but looks for his ticket, and tells me it was 94x50. Sure enough, I find his trade in the T&S made available at , now that he's identified it. But he's not doing his clients any favor. He's hitting low bids to get the trade done. (True, that's sometimes what you do. If you need to get out, you take the price you can.) It's now late in the day, and he argues that putting out an offer is a waste of time.

Yesterday, the MM's (the marker makers) opened trading in Sea Containers' bonds late for wanting to guage the news and customers reactions before they made a market. (That's their privilege and why they can trade against you so profitably. They can see the order flow.) Today, trades are happening fairly soon into the session, and I also pull the news. SCR has executed their sale of property, and the market likes it. The stock has jumped 23%, and the bonds are printing at 96.500 on block orders, not the small stuff of yesterday, with the bid advancing, though the ask is a ridiculous 101 (subsequently adjusted to 100 and then 98). My position has become a distraction. So I e-mail him to step in front of the offer and offer me out at 97, accepting nothing less than 96.500. That's where the market is. That's what I want. Shortly, I get an e-mail to call him. The best bid from anyone for my bonds was 95.160. Did I want to accept? He says, “The position is only 5 bonds. That's what happens when you try to sell just 5 bonds, and why I want you to buy ten. You're going to have to take a point or two less for five.”

Now, let's step back and ask what's going on. At IB I could write my own orders and either make a price or take a price without broker intervention. I'm not holding the bonds at IB. So I've got to trade them through Joe. Collusively, all brokers, all desks, hate dealing with “small orders”. E.g., Scottrade requires the order to be ten bonds. E*Trade imposes a commission of $40-45 on less than ten bonds, plus their usual markup. Fido has no set minimum, shows the inside market, and has a $20 minimum commish. (But their inventory is meager.) IB also has no size minimum and has $5 min commish, shows the inside market, plus allows the customer quasi-direct access by facilitating the writing of orders. In other words, you can make prices, and you'll see them posted nationally in real time. True direct-access to exchanges is offered to stock/futures traders. But for bonds, there are no comparable exchanges, nor will there ever be, because the institutionals don't want the riff-raff in their cozy club. Profit margins would decline. They've seen what's happened in the stock market to spreads and commish and don't want the same to happen to them.

So the game they are playing is this: require your customer to trade te