In Your Best Interest - W. H. (Hank) Cunningham

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this with informed IAs who realize that the desk is on their side — at least a tool for them to use, at best an active partner in helping improve their business. They trust the traders and realize that there are bargains to be had at different times as well as (with the market knowledge of the desk) assistance in timing purchases to again help clients achieve superior yield. These astute IAs are more aware of pending release times for important, market-moving news and new-issue timing. With proper desk contact, IAs learn of temporary sell-offs or rallies to take advantage of. Trusting the desk or at least being straight with it yields huge advantages. Contrast this with the mistrustful IAs who play petty games with the traders, getting their backs up. In fact, through frequent communication with the desk, IAs may pick up gratuitous tips or advice to further their clients’ (and their own) after-tax standard of living.

      You want to seek out an IA who has a sound working knowledge of the fixed-income markets and who does a high percentage of business in fixed-income. Listen to the IA describe how he or she gets along with the desk; if it’s not mentioned, ask. The answer will reveal a lot. Human nature is important; traders are human and will respond favourably to professional treatment. Of course, trading desks are not perfect. One mistake or misunderstanding in an over-the-counter market may colour one’s opinion for a long time. However, a quick glance at the commission statistics will reveal in almost every case that the IAs who give the desk a hard time are in the lowest quartile of production. They waste too much time playing games with the desk and not enough time taking care of their clients. The top quartile of producers do not waste their time or the traders’ time through childish antics. Every retail organization where I have worked has these IAs. It is the same as with a lot of other businesses, where 10 percent of the IAs handle 90 percent of the business. You want to find one of those IAs. The other 90 percent complain and play games and just waste too much time on unimportant issues.

      Transparency, Transfer Prices, Markups, and Commissions

      Transparency: that which is transparent; a transparent object or medium

      Despite efforts to make the bond market more transparent, there is still a dearth of websites where bond prices may be obtained. With the explosion in internet usage, investors are now used to finding and using useful sites. The following three organizations offer free quotes and also offer a subscription service for greater access and visibility.

      CI Financial owns Perimeter CBID, which is a marketplace where several liquidity providers make available bids and offerings on a wide selection of fixed-income securities. Perimeter CBID operates a public website: www.canadianfixedincome.ca. Besides offering live markets on approximately 2,500 bonds, it also contains the previous day’s closing prices, actively traded corporates, and featured quotations. For $19.95 per month, investors may subscribe to Bondview, which offers a more in-depth view of CBID’s marketplace. CBID is not perfect, as it does not have all the liquidity providers, but it does present an accurate view of the retail bond market.

      The TMX owns PC Bond, purchased from Scotia Capital. It has the most complete data base for bond prices and performance in Canada. The programs and analytics are aimed squarely at institutional customers, being far too expensive for individual investors. However, their wonderful site, www.canadianbondindices.com, has a wealth of information suitable for individual investors. It offers the performance of the different sectors of the bond market on a daily and historical basis. It offers live prices on a variety of government and corporate bonds along with information as to volume traded. They do not offer a subscription service.

      CanPX is a joint venture of the primary dealers in Canada plus certain inter-dealer brokers. It provides a composite display of real-time bids and offerings on a variety of bonds. It is geared to the wholesale market, also, but their website offers hourly updates on the benchmark Government of Canada treasury bills and bonds. On a subscription basis, and only available through Gmarkets (www.gmarkets.ca) are two subscriptions: All governments for $125 per month and their corporate bonds for the same amount. I recommend the corporate bond subscription, as this is the most current list of corporate bonds available. In addition, GMarkets has their own product called Pilot, which is a comprehensive view of all aspects of the financial markets. It costs $485 per month but is well worth it.

      Another excellent source for individual investors is the Bank of Canada’s site: www.bankofcanada.ca.

      One of the main reasons — if not the main one — why investors either do not know enough about fixed-income markets or are too timid to venture into them is the lack of transparency of this giant market. As we have discussed, there is no central location for the bond market. Instead, it operates on an over-the-counter, decentralized basis. There is no ticker tape showing trades as they take place, nor is it easy to obtain a quotation. In other words, most of the bond market is opaque, not transparent. Whether transparency is the proper word or not is debatable. Prices of the most liquid bonds, Government of Canadas, are highly visible and widely quoted on a number of websites (www.candeal.ca and canadianfixedincome.ca are two). I feature Perimeter CBID’s live quotes on my website, www.inyourbestinterest.ca, and there are many provincial and corporate prices in addition to the benchmark Canadas. Of course, they represent a tiny percentage of all the bonds outstanding (some 60,000 issues) but at least it is a start. Regulators are pushing for more transparency and I am on a committee of IIROC that is exploring improvements in this area. By now, most clients can see the yields of the bonds that they have traded on their transaction statements. There is a strong push to reveal the commissions charged on each fixed-income transaction. Although most fellow committee members oppose this, I am in favour of it. Investors know how much they are charged for equity trades, so why would they not get to see how much they are paying for a bond trade? There really is not much to hide, as the fees charged on bond transactions are generally fair and do not vary significantly from equity commissions.

      Policy 5 is a code of conduct for IDA member firms trading in wholesale domestic debt markets. It was developed at the behest of the Department of Finance and the Bank of Canada. Its purpose is to “ensure the integrity of Canadian debt markets and thereby to encourage liquidity, efficiency and the maintenance of active trading and lending and promote public confidence in such debt markets.” You can read the entire policy at www.iiroc.ca.

      In recent years, Policy 5B was added. This was aimed directly at the retail fixed-income markets. It requires all investment dealers to have written policies and procedures in place for dealings with individual investors in the Canadian retail debt market. In particular, each investment dealer must have in place a recommended commission or markup for each fixed-income product that they trade. Such a grid would look like this.

      While not generally available, you can ask for and expect to receive a copy of your FI’s grid. At the very least, your IA should be able to tell you what the grid is. As you can see, these are fair commissions (generally, the longer the term, the higher the commissions). This is for two reasons. First, the longer the maturity the less the yield is affected for a given commission, and second, it rewards the IA, as most bonds, especially strips, are buy and hold securities.

      Other proposals are being pushed forward that would require retail bond-trading desks to maintain records demonstrating that their dealing prices are fair. This is a long way from implementation, but it is clear that the push is on to ensure that the retail fixed-income investor will be assured of getting a fair shake.

      A huge hurdle facing bond market transparency has to do with the fact that IAs and their clients are captive to their firm’s bond-trading desk. The Big Six — RBCDS, TD Securities, Scotia Capital, BMO Nesbitt, CIBCWM, and National Bank Financial — are loath to give up their monopoly and trade flow. I am positive that they will not do so unless legislation is enacted requiring them to participate in a commingled marketplace for bonds. It seems to me that if every dealer who wanted to could provide their bids and offerings to a centralized system, and also allow their clients access to the same system, that would solve the transparency debate once and for all. I am also positive that this is going to be snail-like in its progress, as the Big Six have nothing to gain from it; the whole retail fixed-income business is not a very high priority for them. Regulators do run the risk of imposing so many costs and rules on the investment

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