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We now move to slide 15, which shows two key areas to assess the pricing of bonds: 1) market prices shown on an online trading system and 2) corporate bond trades reported to FINRA's Transaction Reporting and Compliance Engine (TRACE). The bond example we provide is for Xerox bonds 4.800% 3/1/2035 (CUSIP 984121CL5).
The Depth of Book table on the left shows seven different dealers providing bid-and-offer quotes on the Xerox bonds. Please note that these bond quotes were provided at 11:33am EST on October 24, 2017 and are shown for illustrative purposes. The best price available on the Xerox bonds was a bid price of 92.63 and an offer price of 93.00. This means you could buy the bond at 93.00 or sell it at 92.63. Since bonds are quoted as a percentage of face value and since the face value of every corporate bond is $1,000, the dollar value of the bid-offer quotes is $926.30 / $930.00.
The best price for both the bid and offer quotes is referred to as the 'top-of-book' price. For the top-of-book offer price, investors will see the total and minimum quantities are 400 and 50 bonds, respectively. This means that, to achieve a price of 93.00, the investor would have to purchase 50 bonds and could buy up to 400 bonds at that same price. This minimum quantity is an anomaly and is rarely this high. Instead, corporate bonds minimum quantities are typically between 2 to 10 bonds. In this case, however, if an investor only wanted to buy 10 bonds, he'd have to buy the bonds at a price of 93.06 since that offer quote only had a minimum quantity of two bonds. The 93.06 offer quote is good for a minimum of two bonds and a maximum of 680 bonds.
Since BondSavvy often advocates selling bonds prior to maturity, we recommend investors own a minimum of five to ten bonds for each CUSIP they own. You'll see, in the bid quote, minimum quantities are from two to ten bonds. While an investor could sell two bonds at a price of 91.30, this price is 1.33 points lower than the top-of-book bid price of 92.63, which had a minimum quantity of five bonds.
Seeing live quotes provided by seven dealers on both sides of the market is one of the many advantages of investing in bonds online. In this case, seven dealers are competing for your business. This is markedly different from many large brokerages, which often have large networks of financial advisors and may preference bonds being bought and sold by their internal trading desk. Investors wanting a competitive marketplace for their corporate bond trades should invest online.
Prior to buying or selling corporate bonds, investors must ensure the displayed corporate bond quotes reconcile with recently reported trades. Broker-dealers are required to report corporate bond trades within 15 minutes of trade execution to FINRA's Trade Reporting and Compliance Engine (TRACE). On the right-hand side of this slide, we show two corporate bond trades shaded in green, which were executed at 11:18:52am. The 'dealer-to-dealer' trades represent the price at which two dealers traded this particular bond. Think of it as the wholesale price or the 'inside' price of the corporate bond.
You'll then see a trade reported as a 'Customer Buy' for 20 bonds at the same time. In this case, the customer's brokerage charged the customer approximately two points (or $20 per bond) to execute the trade, as the trade was reported at a price of 95.20. This Customer Buy trade was bought by a client of a traditional broker-dealer, which charged the customer a two-point markup. While two points may not sound like a lot, if an investor sold the bond prior to maturity, he would then pay a 2-point bond markdown. This is an expensive price to pay when investing in corporate bonds.
Compare this to online brokerage firms such as Fidelity Investments and E*TRADE, which charge a 0.1-point markup (or $1 per bond) for corporate bonds. It's a substantial difference and another benefit of investing in corporate bonds online. Read our blog post that compares financial advisor commissions to online brokerage commissions.
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