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In a separate thread, Howard wrote:

FYI, I find that Fidelity quite often has a larger (and better) selection of bond offer prices compared to E*Trade (although they don’t seem to list as many issues). I think FIDO also uses the Knight Bond Point platform as well as Bond Desk. They have upgraded their search software over the past year, and it is quite good now. And they have knowledgeable fixed-income people to talk too. Fidelity is now my primary bond broker.

Two minutes of poking around confirms much of what he said, though it will take me all morning to thoroughly explore the “new” Fidelity. But here’s one concrete example. At ET, the ASK for Delaize’s 9’s of ’31 is 118.919, with a minimum purchase of 50. At Fidelity, the ASK is more nuanced. You could pay 118.919 for the same 50, or you could pay 117.768 for a lot of 5. Your choice.

Give me a chance to explore some more, and I’ll do a more detailed review, because --like always-- it isn't sea shells and balloons at either broker. Executing at either has its advantages and disadvantages. So where you choose to execute depends on your specific needs, not the number of bells and whistles a broker offers.

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#*%&@. Prices are moving fast on Delhaize. As fast as I refresh, there’s a different price. I have no idea what’s going on. Generally, bond quotes change slowly enough that if you see a price, five to ten minutes later you can still get it. But this seems to be the pattern. Fido is willing to offer four issues of Delhaize (one less than ET) lower than ET. The differences vary from a few bps to as much as a full point, which is huge.

Caution: I'm NOT recommending Delhiaze, nor am I panning it. It's simply a name that showed up on a test scan.
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Well, my survey went faster than I expected, and the results are what I should have expected. The bond market is a $%@in’ mess. Brokers do exactly as they please, the customer be damned. But here’s some concrete examples.

-I’ve already established that Fido (this morning, who knows what things will be like tomorrow?) is quoting Delaize lower than ET.

-When I asked for quotes on Ultrapetrol, I got the same prices, but different minimum required purchases. F, 80(5) ET, 80(2).

-When I asked for ShopKo, Fido wouldn’t quote.

-When I asked for Venoco, Fido quoted two issues, ET only one. But on what ET quoted, they were a point lower than Fidelity.

It’s chaos. $@#^in’ chaos. But this seems to be the pattern. Although there are exceptions, in general, E*Trade (and Zions Direct) quote a wider inventory than anyone else, and generally, at least in the past, E*Trade and Zions could be counted on to quote the inside market, meaning, you weren’t going to find a lower ask unless a broker was holding a small lot in-house and had priced it to move fast. But even just the quick poking around I did suggests that if you truly want the best price and/or the smallest minimum, you gotta shop around.

OTOH, I will say this. In adversity, there is opportunity. The more obstacles there are, the easier it will be for a determined buyer to gain a small edge over his/her competitors. A point here, a point there might not seem like much. But the bond game is nothing if not a fight for every basis point you can grab. So executing at the best prices contributes to the difference between merely average returns and possibly superior ones.
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What's your final call on Etrade versus Fidelity? Your initial post seemed to indicate advantage Fidelity. Your follow-up posts indicate the comparison might be a wash. Between those two, which would you recommend to a new bond investor?
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Between those two (E*trade vs, Fidelity), which would you recommend to a new bond investor?


Actually, neither. Instead, I'd push them toward Zions Direct, with the following caveats.

First, what are the would-be bond investor's objectives? If they describe themselves as a “Defensive Investor” (in Graham’s sense of the term, i.e., low-effort, little-worry investing for modest returns), I truly believe they would be best served at Zions Direct if their intention is to do all of their bond investing in a single account. ZD offers a breadth of fixed-income products that exceeds anyone else’s. Their commission schedule is tolerable, and their search-engine is manageable. In other words, with very little effort, a beginning bond investor could look at what he/she needs to look at and execute without ever worrying that they might be missing out on something better somewhere else.

If that same beginner wants to accept the additional effort and risk (and reward) that moving into the “Enterprising” category requires, (again, in Graham’s sense of the term as he lays it out in his classic intro to value investing, The Intelligent Investor), then I’d also still say Zions for the first account but probably say Fidelity for the second, because as awkward and difficult as their search-engine can be to use, it does some nice, proprietary things that ZD and ET don’t, plus their commissions are going to be a bit cheaper and, even, sometimes their bond prices.

Lastly, if the beginner identifies his/her objectives as including some exposure to speculative bonds, then Fidelity gets put back to third place, because their minimum-purchase requirements tend to be larger than those at Zions or E*Trade, and it takes a big, big account (or genuine stupidity if the account is small, or truly superb research skills) to trade (i.e., ‘invest in’) junk in size. In other words, taking a reasonably-researched flier on a single of anyone’s debt isn’t going to kill anyone’s account, nor is even a basket of reasonably-researched, reasonably-diversified, specualtive singles. But if you start buying in fives and tens, you’re going to go bust, or, at best, do no better than what buying a decent junk bond fund would have done for you.

Unfortunately, the investors for whom doing bonds at E*Trade is going to work best are those who are long-time account holders and who have been grandfathered into being able to download into a spreadsheet the output of a bond scan. You would not believe how fast I can scan and then slam though thousands of bonds at E*Trade to find the very few that are worth at further look. I can attain nearly the same speed at Zions and their search-engine. But dealing with Fidelity’s search-engine is a pain in the butt. At every refresh, all parameters have to be reset, and their inventory isn’t as extensive as E*Trade’s or Zion’s.

I’m sure there are other factors I haven’t mentioned that might be even more important to you. So take my recommendations with “a grain of salt”, as they say.

Lastly, a word about current bond prices. Interest-rates for the high-quality stuff are on the rise at the same time that prices for them continue to be pushed to extremes. Ditto the prices for lower-quality credits. The current market is a mess due to two opposing factors: the Fed’s efforts to push down interest-rates and the very intended effort to push up prices on risk-assets. Things are a real mess, because bond prices don’t reflect rational supply and demand. Meanwhile, the BLS is lying their butts off about inflation, GDP, etc. (So, what else is new, right?) But the net-effect is that it has become very, very tough to pull a real-rate of return (after taxes and inflation) out of the bond market, and my inclination would be to advise beginners not even try. They’re not coming into the market with a substantial, already-established portfolio of fixed-income credits that they can hold to maturity and against which they can charge the risks that have to be accepted by buying at current prices. The better plan for them is to forget about ‘investing in bonds’ and to trade them (or derivatives based on them, which is what a bond fund is) from both sides of the market, long or short, as conditions warrant.

There is one exception to that advice. If a would-be investor intends to lose money in the sense of ‘conserving purchasing-power’ the same way one conserves energy, i.e., by using it up slowly, then he/she can buy whatever in the bond market meets their criteria for stability of nominal principal with a bone tossed toward some income from coupons. In other words, there’s plenty of decent-quality bonds that would offer a highly probable 3%-4% YTM. But why bother? Surely, they can find better things to do with their time and money.

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Just a few additional points about Fido bond offerings:

But dealing with Fidelity’s search-engine is a pain in the butt. At every refresh, all parameters have to be reset

I don’t know, maybe you still have their old search software on your account. My Fidelity search engine has an “Edit button” (just like Etrade) that allows me to change just the parameters I want. It also allows me to “Save” queries by name (just like Etrade). The search engines are now quite similar in function, and Fidelity seems to have more selection options that one can search on.

because their minimum-purchase requirements tend to be larger than those at Zions or E*Trade

This is true now but was not true before. Fidelity seemed to take a step backwards about a month ago. They used to show the same minimums as Etrade for BondDesk offerings. But lately I’ve noticed that even when an issue is listed with identical qty and price, Etrade might have a min of 1 or 2 but Fidelity will only allow a minimum of 5. This changed recently. I wonder if maybe other dealers complained because they were losing small retail business.
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I agree that Fidelity's search-engine (and Zions') has a richer parameter set than E*Trade's. But neither compare to ET's in terms of ease of use. That wouldn't matter to someone who always uses the same set of parameters. Then, as you say, the search could be saved. But I'm constantly experimenting with new ways to torture the data to reveal its secrets, and often enough, going through "the front door" doesn't turn up items revealed by another route.

How to use a search-engine for maximum effectiveness is something none of the introductory bond books talk about, and they really should, because it creates an edge for a would-be bond investor over his/her retail competition. (The big boys, of course, are using Bloomies, which no small investor can afford.)

The required minimum-purchases at Fidelity versus E*"Trade is something I did look at yesterday in some detail, because mins matter to me. At first, I thought Fido had gone to a 5-min, just as Scottrade requires. But whether a sub-five minimum is offered also depends on the underlying desk. Where Fido and ET are re-quoting from the same dealers, the mins tend to be the same. Where the differences arise is from the fact their have established slightly differing networks of dealers.

Gees, bond prices have gotten ridiculous. Yesterday, all ten of my bond alerts at E*Trade were saying that particular holdings of mine had gained in price somewhere between 2.3% and 6.8%. Ditto the eight alerts today. "Congrats", they are saying, "what you already own has gotten even even expensive in price and even more unaffordable." Obviously, a market top is forming, not that prices can't, or won't, go even higher. But I'm having to conclude that the buying season has come to an end for me. YTD, I initiated 87 new positions at a cost of $133k. That's the same number of new positions as all of last year (whose cost was $176k, because a lot of the positions were munis, which have to be bought in fives and close to par, which chews through money fast). So, in terms of putting money to work, I could call it quits for the rest of the year, and rising prices argue that I should.

OTOH, Crazy Ben's policies continue to push me to nearly-daily, new equity highs. E.g., my change in account value from yesterday to the day before was 0.22%, which is ridiculously huge for an all-bond portfolio. True, some of the changes was due to coupons received. But the bulk of it was price changes. I despise the man for the economic damage he is doing to this country. But he is certainly making me richer, dollar by dollar and day by day. That's fun, of course, until things fall apart, which they are going to do, which means it's time to look for a new securities casino to gamble in.

But gees, bonds have been good to me, and the 12-year run I've had has been fabulous. I used to think that investor happiness would be having an account big enough that I could meet the $25,000 minimums that some of the better mutual funds required. These days, $25k have become just petty cash for me, and there's basically nothing in markets I can't afford to do, which doesn't mean that doing the trades would be prudent. But for all practical purposes, my investing/trading choices are no longer limited by money. Meanwhile, the bonds I do already own have an average maturity of 15 years, so I'm also in a position to coast, if I choose. I won't of course. The money game is entertaining enough for own sake that it's likely always to be a part of my life, never mind the genuine insurance function served by keeping investing skills well honed against the day when they might truly be needed.

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