What Could Stoke The Bond Market

Electronic trading at NYSE Bonds should help demystify the complexities of bond trading

Corporate bonds should be an ideal investment for baby boomers. They churn out predictable cash payouts, are generally more secure than stocks, and are rarely as volatile. But hidden dealer markups, a lack of real-time price information, and general complexity have scared off many retail investors. "It's always been a stepchild market," says Donald G. Dueweke, former head of fixed-income trading at the New York Stock Exchange (NYX ).

That may soon change. Electronic trading, which has goosed volume for stocks while making them cheaper to trade, will be coming to NYSE's bond-trading operation, NYSE Bonds, as early as November. Along with it will come real-time quotes and other information for a wide range of bonds issued by many of the 2,700 companies whose stocks trade on the NYSE. Investors who have had to rely on their broker's word for bond prices will soon be able to demand much of the same data they now get on stocks. "We're looking to capture a lot more market share," says John M. Holman, who heads fixed-income trading for the exchange. There's no reason, he adds, that bonds can't be as popular as stocks.

Already, small investors can get more information than they used to. For the last few years, the TRACE system run by the NASD (formerly the National Association of Securities Dealers) has reported information on trades within 15 minutes of each sale, giving investors a taste of what's to come.

But the TRACE system isn't perfect. The quotes are often for bonds traded by institutions, which account for more than a third of transactions and about 95% of the dollar volume. These can be far from the prices that buyers of small lots get. What's more, hidden markups ratchet up the price, driving plenty of small investors out of the bond market entirely. "Five times bitten and forget it," says Robyn Greene, a retired lawyer who lives near Jacksonville, Fla. She has dabbled in bonds for 30 years but now sticks mostly to certificates of deposit.


Once a user-friendly system is in place, a few things must happen to get people like Greene to take a look. For one, bonds won't really take off unless firms market them. That's why the NYSE is heartened that outfits such as E*Trade Financial Corp. (ET ) plan to beef up their bond offerings. By yearend, E*Trade plans to disclose its fees and the costs it pays instead of burying them in the offering price. "We're looking to provide a lot more transparency," says Liat Rorer, an E*Trade senior director.

Such efforts should narrow the differences between bond and stock trading. For years, investor advocates say, bond investors have been ripped off by Wall Street firms that secretly build in markups; thus the yawning spreads between the price investors pay and the price they get when they sell. "The public has been screwed in not having access to a market that has fair disclosure," argues Fred Siesel, a former Securities & Exchange Commission staffer who worked for the NYSE for years to press for a more open bond trading system.

But most small investors have a lot to learn before they can start day trading. Bonds differ radically from stocks: Often a company can call a bond back, returning cash to the investor but making planning tougher. What's more, prices rise and fall inversely to interest rates, so bonds paying high rates command stiff prices when interest rates dip. On top of that, a company's shifting credit ratings can make bonds worth more or less. And companies can issue scores of bonds with different maturities. There are 33,572 different issues right now, according to NASD. "Give people so many choices, and they can't make any choice," says Robert Knox, a senior vice-president at Utah-based Zions Bank (ZION ). You can bet that Wall Street will clear away any remaining confusion once it sees there's money to be made.

By Joseph Weber

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