Online Bond Marketplace Moving to Primetime

BOSTON (06/13/2000) - Online bond trading has been lagging significantly behind stock trading, but two new ventures suggest the gap might soon start to close.

Last week, The Goldman, Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley Dean Witter & Co. joined forces to launch BondBook, an online exchange for the trading of corporate and municipal bonds. Only days earlier, Charles Schwab & Co. announced a partnership with ValuBond Inc. to offer a variety of bonds to its retail investors.

Currently, only 7% or 8% of the bond market is online, said Larry Tabb, an analyst at Needham, Massachusetts-based Tower Group.

"We expect that to increase," he said. "We anticipate that within the next year or two, it will be 40% or 50%."

However, Tabb warned that it's still to early to tell who the major players will be in the bond arena.

"It will take a year or two for it all to shake out," he said.

Schwab's alliance with ValuBond is unlike most other online bond trading platforms in that it targets individual investors, not institutional investors or professional traders.

The ValuBond site, valubond.com, will launch next month, according to ValuBond President Lisa Edwards, and will offer municipal bonds, a wide selection of corporate bonds, agency debt, convertible bonds and other hybrid securities.

In addition, the site will offer tools such as portfolio analysis, calculators and tutorials.

Most other players are targeting institutions and broker dealers.

New York-based TradeWeb LLC, for example, which, according to Tabb, is the most successful of the online bond marketplaces so far, is backed by 15 bond dealers, including some of the largest names on Wall Street. TradeWeb focuses on U.S. treasury bonds and was founded in January 1998.

A more recent start-up is BondBook LLC, backed by Goldman Sachs, Merrill Lynch, and Morgan Stanley Dean Witter, which will offer a greater selection of bonds.

At present, most corporate bond trading is done by telephone, with brokers controlling - and facilitating - the entire process. BondBook promises to open up the system.

"Institutional investors could trade directly with other institutional investors, or a broker-dealer, or a mutual fund - whoever is offering the best price," said Merrill Lynch spokesman John Humphreys. "We wanted to take the opportunity to lead the change in the structure of the markets."

BondBook will begin trading U.S. corporate bonds, high-yield (or "junk") bonds, and municipal bonds in the fourth quarter, he said.

Merrill Lynch is also one of the backers of the MuniCenter, the first online exchange for municipal bonds, which went live at the end of last month.

"They're not sure which of these marketplaces is going to succeed, so they're looking to back a whole host of players," Tabb said.

Tabb said the fact that Merrill Lynch - as well as some of the other brokerages - are backing multiple platforms is a sign that the distribution arms are separating from the product-creation arms of the brokerage industry.

"When that occurs, then from the product standpoint, you need to trade with as many counterparties and as many systems as possible," he said. "If it comes through BondBook, that's great, if it comes through TradeWeb, it's great.

They're moving away from trading through their own proprietary channels, their own sales systems."

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