Saturday, May 19, 2007
Giving Bonds an Electronic Upgrade
TO ENABLE ITS LISTED COMPANIES TO OFFER UP more of their balance sheets to efficient trading and to enhance fixed-income market liquidity generally, the New York Stock Exchange is relaunching its bond platform this quarter. The upgraded electronic bourse should end at least some of the fragmentation in corporate bond trading, an enormous marketplace that’s still mostly off-exchange—which means retail investors typically buy from and sell to a brokerage’s internal inventory.
Finding out whether you’re getting the best available price for a stock trade is easy these days, thanks to the wide availability of real-time quotes. If you want to get the latest quote for, say, General Electric (ticker: GE), you just type the ticker into a quote box. Bond-price quotes, particularly for the many thinly traded names, are considerably more difficult to locate than stocks’. The market’s complexity is partly to blame. There is one class of GE stock available in the U.S., but many, many more GE bond issues, all at varying interest rates and maturity dates.
During June, the NYSE will launch a bond-information site at http://www.nyse.com/bonds that will provide 20-minute delayed bond-price quotes as well as a look at the market for individual bonds. The site will contain listings of all available bonds and give users the ability to search the inventory, based on criteria such as maturity date, coupon, and industry sector.
What will this mean to individual investors? The NYSE’s goal, according to John Holman, vice president and head of fixed income for the exchange, is to open up the bond market, increasing the visibility of pricing and adding liquidity. Holman says that the NYSE is making it simpler for liquidity providers, such as brokerage houses, to link into the platform.
“Having centralized information always drives the cost of execution down, which is an advantage to the retail investor,” adds Holman.
The new platform started with 1,000 bonds and is adding about 500 new issues every few days with the eventual goal of 5,000 to 6,000. Government bonds will eventually be available.
Currently, brokers that allow their customers to trade using Townsend Analytic’s RealTick platform, including Terra Nova Trading and MasterTrader, can view data and place trades on the NYSE bond platform. Holman says several online brokers, including Fidelity, are currently working on giving their customers access. “We hope the online discount brokers hook up to us,” says Holman.
Why We Prefer Barron’s
Consumer Reports magazine’s newly released ranking of online brokerages is strikingly different than the one Barron’s compiled back in March. CR’s top-ranked firm, Firstrade, for instance, came in tenth in our comparable category and its runner-up, E*Trade, was sixth in Barron’s.
Some readers have inquired about the differences. Actually, the results aren’t so shocking in light of the criteria the two publications use. We’re definitely biased, but we happen to like ours better.
The differences mostly stem from the target audiences. Barron’s seeks to address a more sophisticated investor with a more comprehensive array of broker tests. Our online-brokerage client profile is a relatively wealthy individual with at least $100,000 in his or her account who is a moderately active trader and technologically savvy. Consumer Reports’ Money Lab’s target reader is a “typical small” investor who, the service says, “makes two or three stock trades a month at most” and “adds steadily to...core mutual-fund holdings.”
CR rates only Web-based systems (Barron’s also assesses software-based brokers) on trading cost and scope, minimum trade fees, mutual-fund programs, the number of mutual funds available without a transaction fee, banking and asset-management services, the amount of free research and education tools, and customer support.
Barron’s evaluates the trade experience, technology, usability, product selection (with partial credit for items available only via a live broker), research amenities, portfolio analysis and reporting (with an emphasis on tax reporting), the quality of help and means of access, and costs of the Website or software program.
For Barron’s, high-quality trade execution, smart-order routing technology (which finds the best bid or offer), and the absence of internalized orders and reliance on payment for order flow were necessary to earn a high rating. CR’s rankings don’t consider any of these criteria.
Another key difference: Our emphasis is on hands-on testing. We get a trading account with each broker, and run the sites and software offerings through a comprehensive script. I’ll leave it at that.