In Your Best Interest. W. H. (Hank) Cunningham
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in (alas) structured products. Sadly, these products (chronicled in the product chapter) are not created in your best interest, but rather are designed to put big fees into the hands of the investment banking groups and big commissions in the hands of the IAs. As I stress, to be a do-it-yourselfer in the world of bonds, you will need to find a knowledgeable IA with a large book of business such that he/she does not need to do a lot of transactions with you to make a living. Otherwise, and I have heard from many of you, you can open an online account with a discount broker. To assist you, I have conducted my own hands-on survey of the various online fixed-income suppliers, which you will find on page 58.
The investment dealers make their markets in bonds using their own capital, unlike the stock market, where most trades occur on an agency basis (buyer and seller meet and a transaction takes place without the investment dealer needing to use capital).
Why does this difference exist, and what is being done about it? First of all, the majority of the outstanding fixed-income issues do not trade every day, with the noticeable exception of the very liquid Government of Canada benchmark issues. The reason they do not trade more frequently is that a provincial government or a corporation issue bonds of various types, maturities, and amounts. Some issues end up being owned by a few large investing institutions, leaving no “float” (refer back to the TRP example on page 29) Others may be stripped and sold as zero coupon securities. Also, some issues are too small. Foreign investors may acquire a large percentage of an issue.
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