Bond traders bid goodbye to the good life

Richard Seifer's corporate bond traders each made as much as US$1 million ($1.5 million) just three years ago, working from their office in a skyscraper 150m from the New York Stock Exchange.

Today his company is defunct, along with a generation of traders who were casualties of automation. Bond salesmen are becoming relics of a time when the debentures of American companies traded by appointment over the telephone.

"I used to make a good living, and then we were breaking even one month, losing money another," said Seifer, 61, whose offices are now occupied by companies that trade equities and derivatives.

"It's very sad, too, because I provided health insurance, pension funds to my employees."

Since July 2002, traders that buy and sell the US$5.2 trillion of bonds issued by companies from automaker General Motors to computer company IBM have been required to report sales to a computer system that disseminates prices to anyone with internet access.

That transparency has hastened the demise of one of Wall Street's oldest professions, and a moneymaker since bonds financed the expansion of railroads into the American West 140 years ago.

"Technology took a lot of the margin out of the business," said Richard duBusc, a Credit Suisse banker who started working on Wall Street 40 years ago when the NYSE closed on Wednesday afternoons to catch up on its paperwork.

"Is that good or bad? It's bad if you're losing your job. It's good if you're paying a tighter bid-ask spread."

The US Securities and Exchange Commission began to break down the secrecy of the market in 1992 because of concern that high-yield, high-risk bonds were being sold based on inside information about future takeovers. Former SEC chairman Richard Breeden's probe into junk-bond trading led to the creation of the Fixed Income Pricing Service.

President Bill Clinton's choice to succeed Breeden at the SEC, Arthur Levitt, wanted a database to collect the prices of trades on all registered corporate bonds. That system, now operated by securities regulator NASD, posts prices 15 minutes after trades occur.

The system, called the Trade Reporting and Compliance Engine, is known by its acronym, Trace.

Levitt said the corporate bond market used to work like an "Oriental bazaar". "Transparency was at the core of all of its problems," said Levitt. "Our intent was to make the market fairer. The result was that it was also less expensive."

Now that fixed-income prices are available on the NASD's website, bond salesmen have lost their advantage.

A review of 5086 trades involving 22 of the most-active top-rated issues in the investment-grade Bloomberg-NASD bond index shows institutional investors paid US$1.24 per US$1000 bond to trade last month. Four years ago, it was $2.80 per bond, according to a study to be published in the Rochester, New York- based Journal of Financial Economics.

"You're lifting the veil of ignorance," said Peter Campfield, head of taxable fixed-income trading at San Francisco-based Charles Schwab, the biggest discount brokerage by assets, which trades an average of 500 corporate bonds a day.

"Pre-Trace? It wasn't pretty. Price discovery was a challenge.

"You had to hunt and peck and dial numerous dealers to ascertain what a real market looked like."

The bond-trading business has been a loser for big banks as well as boutiques such as Seifer's Bernard Richards Securities.

In May, New York-based First Albany cited "a changing environment and continued declines in taxable fixed-income corporate bond revenue" for abandoning bond trading.

UBS, Europe's biggest bank, fired between five and 10 bond traders in the US to cut costs in its fixed-income unit, an anonymous source said. UBS combined some sales and trading functions, making the jobs redundant.

The positions eliminated were in groups including corporate-bond trading, the source said.

Doug Morris, a spokesman for UBS in New York, declined to comment.

In February, New York-based Merrill Lynch, the world's biggest brokerage, fired three analysts and transferred three others. The head of investment-grade credit research at Merrill, Marc Pinto, was allowed to look for another job at Merrill.

One-quarter of all corporate-bond traders, analysts, brokers and salesmen have lost their jobs in the past two years, according to Michael Karp, head of New York-based executive search and consulting firm Options Group. David Hendler, an analyst who covers financial firms for CreditSights, estimates as many as 500 people work in corporate bonds at the five biggest firms.

"Almost no one does investment-grade research anymore," said Jeffrey Peek, chief executive officer of New York-based consumer and commercial finance company CIT. "We have several faithful analysts who still follow us, but the number of investment-grade research analysts is shrinking."

Securities firms are jettisoning corporate bond staff because they're not generating as much money. Bond traders lost US$1 billion in fees from mid-2002 to mid-2003, or about US$2000 a trade, according to a study to be published in the Journal of Financial Economics.

Since then margins have dropped even farther. Last month the average spread ranged from 55c per US$1000 in bonds for General Electric's 5 per cent note maturing in 2007 to US$2.10 for Johnson & Johnson's 3.8 per cent note due in 2013, according to Trace.

"You have a market that was completely dark for 200 years and instead of letting a little bit of transparency in there, they just opened the windows completely and all the shades and everything, and it was complete sunshine," said Jeff Stambovski, a senior high-yield bond salesman at Miller Tabak Roberts Securities LLC in New York until he quit in 2004.

"I saw Trace come in and we just sort of looked at each other and we knew what was happening."

Seifer's firm, housed in a neo-Renaissance building, had a 465 sq m office that featured a putting green and a kitchen. After work, the traders often went to Harry's at Hanover Square for drinks with rival bond salesmen from Paine Webber and Dean Witter, two firms that have been taken over.

"Maybe it was excessive, maybe we earned more than we should have," said Seifer, who now trades bonds at Aegis Capital in New York. "Some of us would walk away with upwards of US$1 million, but we provided a service that large firms can't provide. What gives the NASD the right to say it's wrong to make $1 million trading bonds?"

- BLOOMBERG