Is The Bond Market Ready For Day Traders?

Volatile U.S. Treasuries provide an opening

Day-trading frenzy may soon be unleashed in the market for U.S. Treasury bonds. Web sites are offering lightning-fast access and timely information--once available only to large institutions--to smaller-stakes investors. At the same time, the volatility of the bond market is heating up, creating the perfect environment for rapid-fire trading.

Whether day trading in the old-school Treasury market will catch on with the intensity of equities is not yet clear. Online bond brokers have dubbed it the wave of the future, while trading veterans say the appeal will be limited.

"We've been pushing the idea of day-trading bonds, and people are really starting to buy into it," says Frederick T. Varacchi, who is president of eSpeed Inc., the largest online fixed-income marketplace for banks and brokers. eSpeed is a spin-off of Cantor Fitzgerald, which clears the majority of U.S. treasuries.

Bonds are no longer the stodgy investments they once were. "What most people don't know is that the 30-year Treasury bond has the same volatility" as an Internet stock, Varacchi says--but with less collateral requirement to trade on margin. An investor in a 30-year Treasury bond, for example, need put down only $10,000 to trade $100,000 worth of bonds, vs. $50,000 to trade a comparable amount of stock.

BIG GAINS. And the bond market can rival equity trading for profitability, especially if investors purchase treasury strips, which sell for deep discounts since they only pay back the principal at maturity. On Feb. 15, 30-year Treasury strips were selling for 17.065 cents on the dollar. By trading on margin, an investor could buy $1 million of these bonds for $17,065. If he timed it right, the 40-basis point swing that day would have netted the trader nearly $2,000.

In recent months, brokerage houses have tightened up their margin requirements for individuals who buy Internet stocks, making bonds even more attractive to speculative investors.

Web sites such as, an online broker, offer retail brokers and big-ticket investors timely quotes on Treasuries. Previously, small investors had to call around to the big bond houses for quotes, and often they were no longer current. At Tradebonds, the minimum account is $25,000, and the firm charges a flat $50 fee for each Treasury trade, regardless of the size.

Tradebonds' clientele differs from typical equity day traders, says president and founder Ed Prado. "There is a real separation between a day trader on E*Trade Group Inc. or Ameritrade, and someone that does a lot of bond trades: It's a much more seasoned investor."

Corporate bonds, especially at the riskier ends of the credit spectrum, are also popular short-term plays, says Prado, although they're not traded as frequently as Treasuries. "There's sufficient volatility," says Prado, for investors to buy into an issue and sell it off the next day.

Big market players are skeptical that retail clients will rush in to day-trade bonds, but fear they may be left behind. "I would never say there is no market for it," says John P. Ladensack, senior vice-president for fixed income at Charles Schwab & Co. The firm is adding bond investment information to its Web site that will allow clients to trade 10- and 30-year bonds online. Improved technology is "providing the opportunity" to day-trade bonds, Ladensack says, but he questions whether there's enough demand.

Some fixed-income veterans are downright opposed to the idea. "If we see day-trading activity, we'll ask you to take your business elsewhere," says Michael Morgan, president of, a Coeur d'Alene (Idaho) online bond brokerage. Regulators take seriously the "know your customer" rule, and could hold his firm responsible for any disasters, Morgan explains. "If you're Joe Investor, it's too difficult for us to discern if you're sophisticated enough," he says.

Most equity day traders simply won't get the urge to day-trade bonds, says Ben Cohen, managing director at CS First Boston. "There's not the same instant gratification as there is with the equity markets," because of less volatility, he says.

Perhaps. But one thing naysayers should remember: Five years ago, most market watchers would have bet a bundle of bonds that equity day trading would never catch on.

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