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Author: Hodag1 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Selling Munis Date: 11/25/2009 5:38 AM
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Hi All,

I recently inherited a sizable portfolio of muni bonds that I wish to sell. I have already sold some of the bonds through my full service broker (in some cases he bought them and in some cases he sold them to another broker).

Using investinginbonds.com I can see that immediately after I sold the bonds my broker (or another broker) made a lot of money by buying them from me and selling them for a much higher price.

What is the best way to go about selling municipal bonds without getting killed on the transaction?
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Author: TMFGalagan Big gold star, 5000 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29206 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 8:03 AM
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What is the best way to go about selling municipal bonds without getting killed on the transaction?

On the main question, I'll defer to the many folks here who use a variety of online brokers to buy and sell bonds regularly. Reading some of their past posts can give you a good sense of how they buy and sell bonds on sites like E-Trade, Zions, and TD Ameritrade. You could always arrange to have your bonds transferred to one of those brokers (with an inevitable fee for the transfers) and sell them from there.

But another option would be simply to go to your broker with the information you've gathered and ask for an explanation. I think you're entitled to one, and you have the data to back up your questions.

You'll probably get a bogus explanation of how illiquid the bond markets are, how prices fluctuate quickly, and all that. But there's a chance that your broker will treat you respectfully, admit that there was a problem and look into it. That might get you better treatment with the rest of your bonds.

And if you don't get a satisfactory answer, then treat it like a customer service issue and buck it up the line at the brokerage firm. Again, you might not get good treatment, especially if you weren't planning on keeping an account there anyway. But there's always the chance someone will do the right thing.

best of luck,
dan

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29207 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 9:01 AM
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Hodaq1

There's an important difference between "getting killed" (which describes having to suffer the consequences of unavoidable bad choices) and "being abused". The latter is what happened to you, not the former.

Your broker took advantage of you, because he knew he could probably get away with it. Find a broker or brokerage firm that won't break security laws in order to make a few extra dollars for himself/themselves.

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29208 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 11:54 AM
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Hodaq1,

You wrote, I recently inherited a sizable portfolio of muni bonds that I wish to sell. I have already sold some of the bonds through my full service broker (in some cases he bought them and in some cases he sold them to another broker).

Using investinginbonds.com I can see that immediately after I sold the bonds my broker (or another broker) made a lot of money by buying them from me and selling them for a much higher price.

What is the best way to go about selling municipal bonds without getting killed on the transaction?


Is there any way for your broker to sell your bonds via limit orders? I would never assume any broker is going to give me the best price for a bond. The bond market isn't nearly as liquid or transparent as the stock market - which still has problems of its own - and I almost always use limit orders to buy or sell stocks too.

To deal with some of this lack of transparency, it would be best if you could find out the price of recent sales on your bonds (or bonds with similar terms) and try to sell them at that price, rather that just taking what the broker offers you.

At no point would I assume any broker has your best interest at heart. They're trying to make a profit. With bonds, the broker often makes a profit both on transaction costs and on the spread by making a market in the bonds. However if you can sell the bonds at what you feel is a reasonable price, it really doesn't matter how much the broker is able to make by marking up your specific bonds. You got what you wanted, so what he manages to make after that is mostly irrelevant.

Also I'd look into replacing your full-service broker. I've never understood the need for one. Of course I'd also never trust someone else with my money or someone else's investment advice. I've seen my father get burned repeatedly by shysters wanting to help him invest his hard-earned money much of my life. He never did well with any of that. But as his son, I've learned a healthy skepticism of other people's financial motives ... and I'd have a hard time trusting the motives of any "full service" broker.

If I had bonds I inherited that I wanted to sell (for whatever reason), I'd research the going price for them and then offer them for sale at or near that price. The broker is just a middle-man and usually the cheapest broker with reasonable facilities (and access) will suffice.

- Joel

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29209 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 1:45 PM
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The problem you mention is the traditional one when individuals buy bonds. You must usually hold them to maturity because selling them prior to maturity usually means you can only sell to your brokers bond desk at whatever price they are willing to offer you.

Secondly, you usually do not know what the market value of the bonds is because most are traded over the counter and prices of sales are not published. (Even bonds listed on the exchanges are rarely traded with small investors at published prices.)

Brokers usually call this the bid ask spread. They make money off the differential between what they buy them for and what they sell them for. The differential can be quite large and there is little you can do about it other than get quotes from several bond dealers before you accept one.

But note that many factors seem to be involved. Small lots of bonds are especially difficult to sell.

You could be better off to 1) take a close look at when the bonds mature, and 2) consider using them as collateral for a bank loan rather than selling them if you need cash sooner. Hold them to maturity if you can manage it; sell them only if you must.

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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29210 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 2:02 PM
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"Sizable" is open to interpertation. But whatever the size, I'd have no problem with confronting the broker if you think he/she took advatage of you. Maybe you can get them all transferred over to another broker at a reasonable cost before giving him/her the opportuntity to shaft you again?

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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29211 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 2:09 PM
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P.S., if looking for a discount broker to sell the rest of the bonds, I'd reccommend Zions.

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29212 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 7:04 PM
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Paul writes: Secondly, you usually do not know what the market value of the bonds is because most are traded over the counter and prices of sales are not published. (Even bonds listed on the exchanges are rarely traded with small investors at published prices.)


Paul,

T&S is avaiable for munis at EMMA. http://emma.msrb.org/ T&S for corps is available from FINRA. http://cxa.marketwatch.com/finra/BondCenter/Default.aspx Also, any full-service broker will have a Bloomie and access to T&S. (How forthcoming they will be about what they really know about where prices are trading is another matter.)

But the situaion you describe --of a would-be seller having to act in the dark-- describes the way things used to be, not the current situation. Any bond position of "marketable" size should be able to be sold at the current best bid or better. If a broker won't/can't quote that price to a seller in real time, then the broker needs to be replaced for incompetence and/or for his/her assumable willingness to abuse the client and/or trade against them, which the SEC regs say is a NO-NO.

1. Duty of Fair Dealing
Broker-dealers owe their customers a duty of fair dealing. This fundamental duty derives from the Act's antifraud provisions mentioned above. Under the so-called "shingle" theory, by virtue of engaging in the brokerage profession (e.g., hanging out the broker-dealer's business sign, or "shingle"), a broker-dealer represents to its customers that it will deal fairly with them, consistent with the standards of the profession. Based on this important representation, the SEC, through interpretive statements and enforcement actions, and the courts, through case law, have set forth over time certain duties for broker-dealers. These include the duties to execute orders promptly, disclose certain material information (i.e., information the customer would consider important as an investor), charge prices reasonably related to the prevailing market, and fully disclose any conflict of interest.
http://www.sec.gov/divisions/marketreg/bdguide.htm#V

Charlie

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29213 of 35400
Subject: Re: Selling Munis Date: 11/25/2009 8:15 PM
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Charlie writes: Any bond position of "marketable" size should be able to be sold at the current best bid or better..

"Just how is that possible?", you might ask. "How can a would-be seller sell his securities at a better price than the current best bid?" Let's step back and do a bit of review.

Whether a securities market is controled by "specialists" or "market makers" (which are terms you need to look up if you don't know the difference), the market will be "two-sided", and, typically, there will be queues of would-be buyers and queues of would-be sellers all trying to get some action. How deep the queues are will depend on the market.

E.g., with futures on the long bond, the depth could easliy be ten or more on both the buy-side and the sell-side. With an illquid/thinly-traded stock, the depth of the queue could be a single offer and a single bid. The listing of the orders (to buy or to sell) is "the book". Some books can be accessed freely. For some, there are fees. E.g., E*Trade provides the book on some corporate bonds, not all, just as they provide both the Ask and Bid for some bonds, not all.

Regardless of whether you can see a two-sided quote, a two-sided quote exists. Someone, somewhere, will be willing to sell, at some price, and someone will be willing to buy, at some price. The national-best offer --i.e., the lowest price at which anyone is willing to sell-- and the national best bid --i.e., the highest price at which anyone is willing to buy-- is called "the inside market." That's a very important term. So understand what it means, which is this. If you want to buy "at the market", you are "lifting the offer". If you want to sell "at the market", you are hitting the bid. But you also have the opportunity to "step in front of the offer" or to "step in front of the bid" by being willing to offer out your securities at a lower price than the current best offer or to bid to buy some securities at a higher price than the current best bid.

If you suspect that what you have to sell is desirable and the current market action would justify letting prices comes to you, then don't hit the bid. Instead, set your price to match the offer or, if you're in a hurry, step in front of it. If nothing happens, only then go ahead and hit the bid.

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Author: persistentone Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29219 of 35400
Subject: Re: Selling Munis Date: 11/26/2009 8:13 PM
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The bond market is an illiquid negotiated market. You need to review pricing on investinginbonds.com and then actively counter offer any bids you receive when you want to sell. Ask your broker to develop a bid on a bond, and after you get back and answer lower your offer to something between the spread.

Your broker will actively negotiate against you, telling you that your offer is not in the market and that you aren't going to execute. Just ignore them. I think the brokers have no idea what they are talking about, frankly. Bond executions are 50% luck, 30% being stubborn, and 20% about the market prices on a given day.

Plan on doing this as many as 10 to 20 times for each sale. If you aren't prepared to spend significant time negotiating, buying and selling individual bonds isn't a place you should be. In your case, unfortunately, you don't have a lot of choice.

As one example, I had a parent in a highly illiquid JP Morgan perpetual bond. I was consistently getting bid $88 to $92. Out of nowhere one day I got bid $98, for no particular reason. Probably JP Morgan got tired of answering the phone calls from my broker. :) Whatever the reason, I sold them all on that one bid, but that was one bid out of about 12, and the other 11 were lousy.

Plan on selling about 1/4 of each position at a time, unless you get an outstanding bid. That let's you audit the result. Challenge your broker on why they bought the bonds from you at $X and then immediately went out and sold them at Y% higher.

If you don't get satisfaction from your broker, open up additional broker accounts, and try to develop multiple bids at the same time. When your broker sees you trading bond positions out of his company to a competitor, he will get the point that you are serious about business and he needs to sharpen the pencil on his bids.

This is going to take a lot of your time. But you said it is a lot of money, so presumably there will be a return on that investment.

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Author: persistentone Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29220 of 35400
Subject: Re: Selling Munis Date: 11/26/2009 8:19 PM
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Charlie, I think your post is based on a wrong assumption. I don't know if munis are different, but with corporate bonds there is NO MARKET. There is no recorded BID and there is no recorded ASK. The corporate bond market is an oligopoly carefully controlled by New York banks, and their Washington collaborators, and their lobbyists. Let no law be passed that makes this market fair for retail buyer or seller. The banks make their money here by making the market as cloudy as possible, to keep the bid and ask spreads very high, so they can pocket all of that as their profit.

Because there is no electronic place where any queue of bids or asks can be recorded, bond trades are done by informal relationships between banks and brokers. Effectively the broker makes a few phone calls and tries to find someone who wants to do a deal, and then collects those prices and prices to you based on that. It's about as advanced as buying sugar in 1920 would have been.

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29221 of 35400
Subject: Re: Selling Munis Date: 11/26/2009 8:47 PM
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Lets see, Charlie gave you the resources to check T&S. In a discount brokerage account you can easily watch the prices, and BlackTree gave a rec. for the folks at ZIONS (which personally I like - but in full disclosure I dont have a personal account there) If you get a price you want - yes sell - but I would like to caution one bit of info

if you can sell the bonds at what you feel is a reasonable price, it really doesn't matter how much the broker is able to make by marking up your specific bonds. You got what you wanted, so what he manages to make after that is mostly irrelevant.

IMHO - it is not "mostly irrelevant" if you are not a sophisticated investor - meaning YOU have a fairly good knowledge of the market, the instrument and the trade. Which in your case you may not have. In that case, it is certainly very relevant - it is the point!

I am certainly not saying your broker took advantage of you. I dont have enough info to make that call. Definitely sounds like a discussion w/ the broker is on order. Not only about the last trades - but ask him what you can do to improve YOUR execution.

d(execution)/dT

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Author: DrTarr Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29222 of 35400
Subject: Re: Selling Munis Date: 11/26/2009 9:04 PM
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but with corporate bonds there is NO MARKET

Huh????

There is no recorded BID and there is no recorded ASK

So that last ASK I saw for UNISYS 6.875 - 2010's around 82?? What was that?

I am certainly not going to opine on the oligopoly, but I think there is a "market" out there - and functional. Could it be improved, OK - YES. Way beyond Sugar in 1920.....

d(BOND MARKET)/dT

Charlie - UNISYS? Care to throw me your thoughts?

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29224 of 35400
Subject: Re: Selling Munis Date: 11/26/2009 11:14 PM
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persistentone writes: Because there is no electronic place where any queue of bids or asks can be recorded

Sir,

To say there is no market for corporate bonds (in the sense that there most defintely is a physical exchange where stock trades can happen) is technically true, but also a pointless quibble in terms of getting bonds sold (or buying them). So what if the NYSE is a physical exchange. The NASDAQ isn't. Does that make it less of an effectively functioning market? With corporates, the structure is even looser. But it is a marekt in any meaningful sense of the term. Buyers and sllers agree on prices and execute trades, and those trades (Time & Sales) are recorded and reported in a timely mannner.

I can see the book --the order queue -- for bonds. Not for all issues, but for some, and I can see the inside market from either of two accounts. The bond market is far from being as opaque as you claim.

You also write: The corporate bond market is an oligopoly carefully controlled by New York banks, and their Washington collaborators, and their lobbyists. Let no law be passed that makes this market fair for retail buyer or seller. The banks make their money here by making the market as cloudy as possible, to keep the bid and ask spreads very high, so they can pocket all of that as their profit.

Lordy, lordy, lordy. A conspiracy nut.

Yes, the bond market is institutionally-dominated, and retail investors are abused. But things are far better for us than even five years ago, and getting better every month in terms of lower fees, better access to data, easier ways to place trades, faster fills, etc. Yes, I'd like to see narrower spreads. But that isn't going to happen until more would-be bond buyers demand it by actually participating in the bond market. Retail bond investors represent less than 10% of the daily volume. Why should anyone bother to cater to us?

It's about as advanced as buying sugar in 1920 would have been.

Why pick on sugar? Why not look at the cotton market or the stock market of the '20s about which I do know something, for having read some of their history, and today's markets are far less manipulated. Not perfect, nor even very fair, but far better than they were. My complaints are the bond market are lengthy and long standing. But I can also report this. I can get my business done in that market and make a profit.

Charlie

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29225 of 35400
Subject: Re: Selling Munis Date: 11/26/2009 11:29 PM
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Charlie - UNISYS? Care to throw me your thoughts?

Doc,

It's too late tonight for me to go digging into a specific company and its bonds. I'll take a look in the morning and send you my thoughts by PM.

But I'd also suggest that you know the drill. Construct a yield-curve of their bonds. Pull T&S. Go to their website. Pull their financials. Look at their stock chart. Pull S&P reports on the company and its industry. Then ask yourself this question:

Is this company in more trouble than I want to deal with considering the price at which their bonds are now being traded?

If the discount offers a reasonable margin of safety and if trading action suggests an escape path is possible, then size a position and write your order. Otherwise, look for a better opportunity.

Off the top of my head, I think you're probably late to the trade. But I've done no DD at this point, and I'm just guessing.

Charlie

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Author: persistentone Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29247 of 35400
Subject: Re: Selling Munis Date: 11/30/2009 4:01 PM
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There is no recorded bid or ask for corporate bonds, that retail investors can execute a buy or sell against.

Everything in the bond market is a negotiated deal. You can have 20 trades on FINRA TRACE for one corporate bond on a given day, and still not be able to get an offer for a bond at *ANY* price. It took me 12 tries recently to get some FSA Baby Bonds, even with multiple brokers trying to get me an offer, even trying every day, even with 10 or more trades in FINRA TRACE appearing on some days.

It's common to see spreads that are more than 5% either direction of some mid-point. That's not liquidity. If you put bonds that today trade on an over the counter market, the spreads would quickly come down to less than 2% either direction. Retail investors would instantly have certainty in buying or selling against published bid or ask.

It's nice that you have access to the "order book" of many corporate bonds. But 98% of us don't. I guess you are very special.

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Author: persistentone Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29248 of 35400
Subject: Re: Selling Munis Date: 11/30/2009 4:23 PM
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That should have read:
"If you put bonds that today trade on an over the counter bond market onto an electronic exchange that retail investors could participate in, the spreads would quickly come down to less than 2% either direction, and on high volume corporate bonds the spreads would be under 1%."

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Author: persistentone Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29249 of 35400
Subject: Re: Selling Munis Date: 11/30/2009 4:27 PM
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DrTarr, UNISYS 6.875 2010 CUSIP 909214BH0 is trading around $98 to $101. Where do you see $82?

There is no bid or ask on that bond. You negotiate a price with your broker. If the bond trades today at $99.6 there is no guarantee that you can buy or sell at that price because that is not a published "ASK". $99.6 is a reported trade (past tense), and there is no guarantee that any other bond offered will be at or close to that price.

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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29250 of 35400
Subject: Re: Selling Munis Date: 11/30/2009 5:11 PM
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"persistentone" writes: It's nice that you have access to the "order book" of many corporate bonds. But 98% of us don't. I guess you are very special.

Sir,

Your guess of 98% is just an irresponsible guess of the same poor quality as your other statements. You don't know who has access to the order book for corporate bonds (and who doesn't), just as you don't know much worth knowing about bond investing, corporate or otherwise.

Anyone who opens an account with E*Trade gains automatic access to the order book for corporate bonds. How can that be special?

But I will tell you what your deliberate intentions to misunderstand me have earned you, namely the non-special status of henceforth being on my "Ignore" list.

Have a nice day.

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Author: persistentone Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 29264 of 35400
Subject: Re: Selling Munis Date: 12/1/2009 5:16 PM
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I wasn't trying to get on your bad side, and I'm sorry I did. However if you try to be more objective about this, you were fairly insulting in much of your prior posts, calling me a conspiracy "nut" etc. If you are going to dish it out, then please try to have a thicker skin and learn to take it as well.

Unfortunately in this case, what you interpreted as an insult wasn't one. You *are* special. You are obviously a very advanced bond investor, and the things you are doing like constructing bond yield curves, and identifying particular bonds that are outside that curve, are not things many investors do. You present like a professional who has been doing this for 10 years, and it's not representative of what typical retail investors can do. You may have no problems getting pricing you like on bonds you buy and sell, and more power to you. But most of us don't have such an easy time of it in the bond market. Buying and selling equities is easy by comparison, because equities trade on mostly transparent marketplaces.

E*Trade and Zion's both use a bond platform named "BondDesk". That is the "order book" you are seeing. This isn't the same as NASDAQ or NYSE for bonds, and let me explain why. In a true electronic marketplace, *all* of the participants expose their bid and ask to a public view. Even if there is a gap between those positions and no trades take place, just the ability to see where the other side is, and to do this across the entire marketplace, greatly improves liquidity. BondDesk is a proprietary black box application that a few dealers and brokers participate in that does create the appearance of a marketplace. But at any given time only about 20% of all bonds have any active bid or ask in this market. More importantly, this "order book" represents a subset of the entire market for any one bond. If there are 200 desks that deal in a particular bond, and 15 of those are in the BondDesk platform and choose to use it on a given day, then that doesn't give you any kind of comprehensive view of the real market. Yes it is better than nothing, for the 20% of bonds that are being bid or asked on a given day. No, it's not the transparency of NASDAQ or NYSE.

I think the example I gave with the FSA Baby Bonds exactly proves my point. When these traded on NYSE and Pink Sheets, they were doing 20K to 30K volumes every day. Any person could buy or sell them at a known price, instantly. The spreads were tolerable. The very same day FINRA moved these to the over the counter bond market all liquidity on them dried up. Volumes went to 2K to 3K per day, average. More importantly, the FINRA TRACE data was not actionable. I was calling two brokers for weeks trying to get *any* offer and they couldn't find one. These were on days when many trades were taking place. The problem is FINRA TRACE is a *reporting system* and not a marketplace. You don't get to examine a broker's sale of a baby bond ($25 par value) at $13.25 and then get to do the same trade. In many cases the broker simply had the inventory from someone else within the same firm and that deal cannot be easily replicated. In other cases someone knew someone who knew someone, and simply worked the personal network to construct a deal, which gets reported on TRACE. Again, the retail investor could not take advantage of that.

I understand the bond market suits you fine the way it is, and it presents you no problems. That's fine. But I maintain that for most retail investors who actually bother to follow the FINRA TRACE data before they buy or sell a bond, the existing over the counter bond market is a real pain. Spreads are huge compared to equities. Simply getting a bid or ask can be extremely time consuming. The existing system screams for the liquidity of a true electronic exchange that services the entire market, and exposes everyone's bid and ask to inspection and immediate electronic execution.

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