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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35346  
Subject: Re: IBKR Pushing Hard Into Bonds Date: 6/22/2010 10:27 AM
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Many smart insider type folks believe that one of the causes for the mystery stock drop event of early May was the lack of human intervention. This group argues that machines did exactly what they were programed to do and there was not enough real world thinking involved.

I am not a fan, in any way, of the smoke filled behind closed doors OTC methods currently used within the bond industry. Nor do I think that a small investor entering the bond market requires some sort of special supervision and a further disclosure notice. Buyer beware, we got it; not all same company bonds are the same, thank you we understand. I do believe that the bond market does need, more so than the stock market, market makers. What I want is greater transparency coupled with greater access all of which is very plausible with current technology.

A pure electronic system for bonds because of the multiple issues, converging maturities and scattered coupons all at the same or near the same YTM is not going to be liquid enough for either the small retail investor or the larger institutions. One part of the reasoning behind the current system is it provides the liquidity the big players need, the small players are welcome to the scraps. A hybrid system of market-makers and electronic trading that is fast, transparent and equal is probably our best hope.

The reason NYSE system hasn't taken off is because it doesn't work, I don't mean that it is functionally flawed, I mean that it is a mechanism that the big players don't need. What we are really dealing with here is much like the early days of the WWW, information scattered all over with no compelling reason to consolidate that information. What we need isn't a central marketing place, what we need is a secure "yahoo shopping" for bonds system that is trusted by all its participants. Let the broker-dealers list their inventory and prices in their "store", let buyers sort the issues and the prices across stores. let the buyers double check recent prices aka a FINRA window. Most of this can be accomplished with a surf a click approach while the market makers continue to provide liquidity quietly in the background. In fact the market-makers may be able to smooth even more bumps out if they have a better view of the broader market.

I applaud the attempt and hope they make some inroads but I don't foresee anything that would dramatically reshape the market.

jack
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