Fixed Income At Your Fingertips

E-brokers are cutting trade costs and offering better pricing data and analytical tools for millions of bond issues

People buy stocks to get rich and bonds to stay rich. Or so the saying goes. Is it any wonder, then, that online brokers have traditionally cared more about equity investors? Stock owners make far more trades and throw off far more in commissions than bond buyers. So for Web brokers, bonds were an afterthought.

Until now. A number of e-brokers have quietly built effective trading services for bonds, offering better technology, novel research tools, larger inventories, and more transparent pricing. This is no mean feat. Unlike stocks, most bonds trade infrequently, if at all, and may be available only at certain dealers. Moreover, there are some 4 million bond issues extant and often precious little information about individual ones. That compares with about 10,000

U.S. stocks, many of which are tracked incessantly by analysts.

Other e-brokers may be cheaper or offer more issues, but Fidelity Investments has the best technology for finding and analyzing bonds. "How do I get you the right information on, say, a particular bond of Ford Motor (F ) when Ford offers 1,700 unique bonds, each with a different maturity, price, and credit features? That was the challenge for us technologically," says Andrew Wrobel, Fidelity's senior vice-president for fixed-income products.

About half of the 10,000 bonds Fidelity offers every day come from the broker's trading desk. The others come from BondDesk Group, an electronic marketplace that consolidates bond dealers' inventories and prices and puts them online. Fidelity will flag a bond if it determines a dealer's price is too high or if the yield is excessive relative to the credit rating. "Often the credit ratings lag the news on a company," says Wrobel. "So if a General Motors (GM ) bond is yielding 8% and is still rated BBB when BBB-rated bonds are only yielding 5% on average, we would flag that. The market is indicating that its credit quality may not be as good as its current rating suggests."

WATCH THE YIELDS

Most bond brokers allow you to screen for bonds based on maturity dates and credit quality, but they usually display the results as line items in a table. Fidelity's Scattergraph tool plots the results graphically along a yield curve, making it easier to spot bonds that yield more than comparable issues. Another tool provides detailed snapshots on two bonds side by side, and the hypothetical trade feature allows you to see how a bond purchase would affect your portfolio. Fidelity is also the only e-broker that offers historical price data on bonds.

Of course, gee-whiz technology means nothing if you can't get a good price. Traditionally, bond brokers have charged a markup instead of a flat commission. So if a broker buys a bond from a dealer for, say, a par value of 100 (in bond parlance, that's a $1,000 bond), he might mark it up to 105, building in a $50 profit. The problem for investors: Because the commission is priced into the bond, you can't separate out the markup.

Online brokers are starting to move away from markups to a flat commission system, much like that on stocks. Fidelity charges $2 per corporate bond, $1.50 per municipal bond, and 50 cents per Treasury bond--or $19.95 per trade, whichever is greater. At Vanguard Brokerage Services, the price is $2 per corporate bond (with a $25 minimum), $5 per municipal bond with a $50 minimum, and 75 cents per Treasury bond with a $40 minimum. E*Trade Financial (ET ) plans to shift to flat commission pricing for bonds by yearend, and Schwab is considering it.

Bonds for Less, a brokerage site run by Zions Bancorp (ZION ) of Salt Lake City, charges a flat $10.95 for bond trades. It's not quite as good as it sounds, though. Most of the bonds come from BondDesk, where markups from dealers are already priced in. So the $10.95 is on top of what BondDesk charged.

James Klotz, presidentof FMSbonds.com, an online municipal bond dealer that only offers bonds from its own inventory, is passionate about the distinction. "Anybody who says they can do a $50,000 bond trade for $10.95 is misleading you," he says. "They're selling you my bonds, and I already got a point and a half [$75] on the trade." Still, W. David Hemingway, executive vice-president at Zions in charge of Bonds for Less, notes that BondDesk's securities carry institutional markups, significantly lower than what individuals pay.

FLUCTUATING MARKUPS

Even with markups, prices can be competitive. Schwab, which offers 20,000 to 25,000 bonds a day, half from inventory, says its prices compare to Fidelity's. "If a bond we've purchased for our inventory has rallied, we can offer it for a lower price than the average dealer," says Jim White, Schwab senior vice-president. Indeed, when we compared brokers, Schwab's markup for a General Electric (GE ) Capital bond ranged from 50 cents to $1, beating Fidelity's $2 commission.

Also, you may decide it's worth paying a markup for a low-priced bond not available elsewhere. Shop4Bonds' site has 45,000 bonds; its markups range from 0.1% to 0.2% of a bond's yield. That generally means $4 to $8 a bond for high-rated corporates. "Chances are if a bond's available for sale, you'll find it here," says Jim Korth, managing partner.

Still, the only way to get the best deal is to comparison-shop. This can be simple with Treasuries, but finding two identical munis can be nearly impossible. So until every broker offers the same bonds for the same price, buying bonds will never be as easy as buying stocks.

By Lewis Braham

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