Steve Shaw Presents to SEC Committee on US Corporate Bond Market Transparency

You can now view the webcast of BondSavvy founder Steve Shaw's July 16 presentation to the SEC's Fixed Income Market Structure Advisory Committee (FIMSAC) by clicking .  During the presentation, Steve refers to his SEC comment letter posted here.

The presentation covers two main areas:

1) The current state of pre-trade transparency in the retail corporate bond market; and

2) Recommendations to further improve pre-trade transparency for retail corporate bond investors

The bottom line is that transparency in the retail corporate bond market is strong, but we need to enable more investors to take advantage of this marketplace. Steve lays out a number of ways to accomplish this in his presentation.

Please see a transcript of Steve's presentation below:

MIHIR WORAH, PIMCO: Sure.  And while many institutional investors at the end of the day represent individual retail investors, let's hear from Steve Shaw and BondSavvy, who directly works for the individual investor. 

STEVE SHAW, BONDSAVVY:  Great.  Thank you, Mihir.  And thank you to Michael [Michael Heaney, Committee Chairman, SEC FIMSAC] and the rest of the FIMSAC for having me speak today.  It's a privilege to be here.

I founded BondSavvy because I believe that individual corporate bonds are underrepresented in investor portfolios across the United States.  There are about -- it's only about less than 1 percent of investor portfolios are in individual corporate bonds, and I wanted to change this.  And what BondSavvy does is we make 25 CUSIP-level recommendations per year, both the buys and the sells.  And we also provide investors with educational videos and blog posts so that they can become familiar with investing in individual corporate bonds.

Prior to BondSavvy, I led Tradeweb Direct.  I was a senior executive at BondDesk, two leading fixed income ATSs (alternative trading systems), and I was also an investment banker and a senior corporate executive focused on mergers and acquisitions.

Presentation Agenda

I'm going to focus on two different things today. And just so folks know, previously I provided to the SEC the BondSavvy comment letter that's available on the SEC website. And I'm going to touch upon different parts of that as I go through my presentation. I'm going to talk about what pre-trade transparency looks like for retail investors today. And then I'm going to go through some of the recommendations that I personally have for that.

Current State of Pre-Trade Transparency for US Corporate Bond Investments

When we look at pre-trade transparency, we believe it's not just about the trade, because a lot of it is about the financial disclosures that are available to investors on the specific investment. And I believe that when you compare the financial disclosures that are available for a corporate bond investor, you've got everything that an equity investor has. You have all the SEC filings. You have interviews with the CEO. You've got proxy statements. You've got everything. You then have all the documents that pertain to that specific issuance. So I believe that if you compare an investor investing into an individual bond, that that investor has a greater level of transparency than one investing in, say, a bond fund or an ETF, which is always changing and turning over. 

The ability to assess the pricing of the bond is obviously another big piece. And I'm going to focus folks' attention to graphic 4 of the paper that I put together, on page 5 [click here to view BondSavvy's comment letter]. And many folks will be surprised as to the quality of pricing in retail fixed income. And what's interesting is that I hear a lot of institutional investors talk about, well, it's really hard to get liquidity for 10 million, 25 million. And that's right because there aren't that many counterparties, compared to in retail fixed income, it's pretty easy to find someone to trade 5 bonds or 10 bonds or 25 bonds. There are over a hundred dealers who can make  that type of market. When you look at graphic 4, this is the depth of book for an Apple bond. So Apple 3.45% 2/9/45 [CUSIP 037833BA7 or "Apple '45 bonds"]. You see that there were 10 dealers quoting on the bid side.  There were eight dealers quoting on the offer side.

A couple things worth noting. You look at the spread. So you look at the spread; the yield to maturity on the bid side was 3.99%, on the offer side, it was 3.97%. So a 2-basis-point spread, which I believe compares very favorably to the institutional market. You look at the MarketAxess Bid-Ask-Spread Index ("BASI"). In this particular case, it's actually inside of where it is for block trades. Another point worth mentioning is that, for retail fixed income, I refer to it as a very  egalitarian type of market. Now, when you look at the quantities associated with these different quotes -- let's look at the right side. You look at the offer side, and you'll see the quantities associated with this. This quote for 91.459. The minimum quantity is only 10 bonds. So someone who can buy 10 bonds, about $10,000, can get the same price as someone who's going to buy 100 bonds or 250 bonds. So the thought that you need to be a large investor to be treated fairly when you buy corporate bonds is just not true, as shown in this case.

Now, people think, well, that's an Apple bond. So what does it look like when you deal with a non-investment-grade (also known as 'high-yield') bond? So when you look at page 6, this is the DSH DBS Corp. 7 3/4% 7/1/26 (CUSIP 25470XAY1, "DISH '26 bonds") bond. And people think, well, a non-investment-grade bond. What type of liquidity [is available]? Maybe you'll get three dealers? Maybe you'll get four dealers? Well, you have 10 dealers on the bid side and you have 12 dealers on the offer side. And you look at the bid-ask spread. Again, it's 10 basis points (or 0.10%) on a yield basis. It is about half a point from a dollar-price standpoint.

So what's important for folks to realize is that the retail corporate bond market is strong. There are lots of dealers. There are lots of trades that are taking place, which I'm going to show you in a moment. It's a strong market where more investors can transact.

We then move on to page 19 and graphic 9. This is a bond, Bed, Bath & Beyond 3.749% 8/1/24 (CUSIP 075896AA8, "Bed Bath '24 bonds"). This is a bond that BondSavvy recently recommended. And so when we were looking at that particular bond, we obviously did our financial analysis and looked to see how the company was doing and all that kind of stuff. We looked at the depth of book, which was strong.  Then of course we looked at TRACE (FINRA's "Trade Reporting and Compliance Engine"). And this bond -- so Bed Bath & Beyond has three bonds. It has one due in 2024 that's $300 million in size, one in '34 that's $300 million, then a larger one in '44. This is a $300 million issuance. And you'll see that there were over -- there were about 20 trades that took place in an hour, right around when we were looking to invest in this bond. So if you go down to the bottom of the table, that was 11:12 a.m., right around lunchtime, up above. The trades that I boxed are the inter-dealer trades. So you had about nine dealer-to-dealer trades that took place in an hour. And in this case, it's a fairly simple process in that you see where all of these trades are. They're all right around 85 and a half, some closer to 86. And this is happening in a small issuance size. So it shows that there's sufficient trading activity that's happening in individual corporate bonds.

BondSavvy's Recommendations for Improving Pre-Trade Transparency for US Corporate Bond Investments

So what are some recommendations that we have?  Because while the market is strong, investor participation is still relatively weak. So what are some things that we can do to change this?

Turn to page 12 on graphic 11. And what I'm going to focus on first is the way to make it simple for investors to understand the pricing of a security. So right now if you go onto your brokerage account, and you go and you'll search through 9,000 bonds, and you'll see the TRACE activity. It's very tedious to get through in that you'll see 20 trades, and you've got to click through, and you'll get carpal tunnel if you keep clicking through to see the full -- all the trades that happened. What's interesting, and I'm going to refer back to this Bed Bath '24 bond -- if you look at the trading activity of this bond in graph 11, you'll see that the trade that I've boxed, 94.63, that was one of the last trades of the day. And you'll see how that price was substantially higher than the trades that were right before it. All the trades that were right before it were kind of 91.5, right around 92. And the reason for that is because there was a big markup in that bond, about a 2-point markup. So my first recommendation relates to the graphs that are currently provided in FINRA [access charts here]. So right now, most retail brokerages -- they show it on table format -- my recommendation is that the retail brokerages show it in graph format to make it easier for folks. But the change that I would recommend here is that if you look at the -- if you look at this graph,  and I'm on graphic 12 on page 13, you'll see that this Bed Bath '24 bond had a supposed spike in its price. And if you look at where I circled in green, the last trade price, it's that 94.63 price that I showed in the previous slide. Now, when you look at this -- when you look at the chart, you're like, oh, well, what was happening in this bond? And the truth of the matter is nothing happened; it's just that there was a markup. The price that should be shown is the dealer-to-dealer trade. And I believe that if we show that price, it'll present a more fair and a more indicative price in terms of what actually can be transacted in the marketplace.

The next recommendation I would make with regard to these charts is to add credit spreads, so spread to the comparable Treasury. My goal is to put the retail investor on the same playing field as an institutional investor. So institutional investors, obviously, they have got lots of investment [resources] at their disposal. They have all the fancy analytics. I'd like to see an individual investor see credit spreads because, right now, when I go out and talk to investors, they believe that the only thing that drives corporate bond prices is interest rates.  They don't even necessarily recognize that there is a credit component to it. And I believe that if we add credit spreads to these charts, that'll help significantly change the discussion around corporate bonds and have investors really understand how corporate bonds trade and why the prices move.

The next recommendation relates to the behavior around investing in bonds. And I'm on page 14, graphic 13. Now, as I've said before, there aren't that many people who invest in individual bonds. But those who do generally buy them and then they put them away for safekeeping, and they hold them maturity. They create what's called a laddered bond portfolio. And we believe that creating a laddered bond portfolio is not the best outcome for investors because it restricts their choice, it lowers the return, and it reduces the amount of secondary trading activity that happens in the market because those bonds just aren't traded [when held to maturity].

I've created a chart here in graphic 13 that shows the pricing distribution of investment-grade bonds that were available on There were about 2,000 bonds that had yields to maturity of over 4 -- at least 4 percent. And you'll see the distribution is that between par and 110, about 35 percent of the bonds were priced between there. And you'll see it's kind of an even split between what's below and what's above. But what's important for investors to understand is that bond prices don't go up to 200.  Bond prices are not stock prices. Bond prices have, effectively, a ceiling.  And you'll see here the ceiling is effectively 150. Only nine bonds out of the 2,000 got to [a price of] 150. And so what I want investors to realize is that if you buy a bond at par and that bond goes up to 125 or 130, and let's say that it does that in two years, and the bond matures in 2024, it doesn't make a whole lot of sense to hold that bond to 2024 to get par back. You could have gotten 130 [by selling the bond prior to maturity]. And when retail brokerages have conversations with their clients, I think it's really important for them to help their clients understand this dynamic: that you don't necessarily always want to hold the bond to maturity.  There can be a solid rationale for selling it prior to maturity. And if you have more investors selling bonds prior to maturity, you obviously have more bonds that are trading in the marketplace. You have a more active secondary market.

Next is recommendation 3. And this relates to the statement prices that are available on retail brokerages. And I'm on page 15. If you think about it, we have baby boomers retiring each and every day.  They're going to be transitioning from heavy stock concentration to more fixed income concentration.  The question is, what investment vehicles are they going to use? They're currently [primarily] comfortable using bond funds [and ETFs]. That's fine. But to get them comfortable investing in individual bonds, we need to address the point of what people perceive to be the bid- ask spread or a wide bid-ask spread.  And the challenge in the market is that [suppose] you buy a bond at 98, you might be able to sell that bond at 97.5 that day. But the price that you see on your statement, or the price that you see online, is what's called an evaluated price. So that has all different sorts of factors that are going into it. And more often than not, the market price that you get is better than the evaluated price. The evaluated price makes a lot of sense for a security that's not trading very often; maybe it's a municipal bond.  But what I'd like to see is that if there's an active quote in the size of the position that the client holds, that should be the price that's shown on the statement. So if the client can sell it at 97.5 and there's a quote there, that's the price that should be reflected on the statement, not the evaluated price.

The last point I want to make is with regard to how financial services firms approach the discussion of individual bonds vs. bond funds. And it seems that, based on a lot the discussions that I have, the default for a financial advisor is to put it into a bond fund. It's easier.  The advisor doesn't have the risk of making a mistake. He'd rather put the risk off on a large buy-side firm. But what's important for the industry to understand and to push forward is that we want investors to be as familiar with as many different types of asset classes as possible. As I said before, individual bonds are far under-represented in investor portfolios. And so when we have a discussion with clients, it needs to be even. We need to talk about how individual corporate bonds can be an alternative; the benefits of individual bonds in terms of fixed coupon, repayment of principal at maturity, the ability to be selective. I believe if we have those conversations, it'll create another asset class that investors can use very well to their advantage. Thank you.

MIHIR WORAH, PIMCO: Thanks, Steve.

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