DOJ investigating online bond brokers

Officials in the brokerage industry last week confirmed that some financial services firms have received letters from the US Department of Justice (DOJ) asking for information about their online bond trading plans.

          Officials in the brokerage industry last week confirmed that some financial services firms have received letters from the US Department of Justice (DOJ) asking for information about their online bond trading plans.

          Merrill Lynch & Co and BondBook, which is one of three major online bond trading exchanges set up with the backing of various brokerages, both say they have been contacted by the DOJ. "We intend to fully comply with the inquiry," says Joseph Cohen, a spokesman at Merrill Lynch, which is a backer of BondBook.

          According to BondBook spokesman Steve Van Anden, the government's letter was targeted at a wide range of information about the bond exchange's business model and organisational structure. "It was very broad in scope," he says.

          But it remains unclear how widespread the investigation will be. The DOJ didn't return several calls seeking comment. Analysts who follow the financial services industry say they were aware of letters being received by several companies, but the two other major bond exchanges -- TradeWeb and Chapdelaine & Co's TheMuniCenter -- say they haven't been contacted yet by the DOJ.

          Like Merrill Lynch, major brokerages such as Goldman Sachs, Morgan Stanley Dean Witter & Co and Citigroup's Salomon Smith Barney are backing the various electronic trading systems for bonds that have been developed by BondBook and its rivals.

          Analysts say they aren't sure exactly what the DOJ hopes to accomplish with the investigation. "It seems to me that it's late in the game for the Justice Department to discover that the bond market is a collusive environment," says Deborah Williams, an analyst at Meridien Research. "It's dominated by a very few key specialists."

          In fact, Williams says, the emerging online markets may actually be more open than the traditional ways of doing business. "From our research, there's potential . . . for some of the new systems to really open up the bond market," she says adding that greater price transparency could be one of the positive benefits.

          Because BondBook is a start-up, Van Anden says, the company recently had to document its business plan and operating models for other regulatory reasons. As a result, giving the same information to the DOJ shouldn't be burdensome, he adds.

          Another Wall Street insider, who asked not to be identified, says the general feeling among brokerages is that this kind of oversight by the DOJ is good for the industry in general. "The government is following the rapid evolution of e-commerce and attempting to balance the various changes in the marketplaces with the needs of industries and their customers," he says.

          So far, there haven't been any signs that the operators of online bond exchanges have been taking unfair advantage of the new electronic marketplaces, says Larry Tabb, an analyst at TowerGroup.

          However, he adds, there is a worst-case scenario in which bond dealers create a stranglehold on the market and then use it to shut out their competitors and collude on prices. That could help them to artificially widen spreads on the trading of bonds, which Tabb says would put more money in their pockets and leave less for individual investors.

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