By Mark Pittman and Caroline Salas
Oct. 24 (Bloomberg) -- Richard Seifer's corporate bond traders each made as much as $1 million just three years ago, working from their office in a skyscraper 150 yards 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 in the old U.S. Express Building at 2 Rector Street 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 $5.2 trillion of bonds issued by companies from automaker General Motors Corp. to computer company International Business Machines Corp. have been required to report sales to an NASD 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.''
Insider Questions
The U.S. Securities and Exchange Commission began to break down the secrecy of the market in 1992 because of concern 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 the NASD, posts prices 15 minutes after trades occur. The system, called the Trade Reporting and Compliance Engine, is known by its acronym, Trace.
Breeden didn't return phone calls for comment. Levitt, who's a member of the board of directors of Bloomberg LP, parent of Bloomberg News, 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.''
Advantage Lost
Now that fixed-income prices are available on the NASD's Web site, bond salesmen have lost their advantage.
Institutional investors paid $1.24 per $1,000 bond to trade last month, according to a review of 5,086 trades involving 22 of the most-active top-rated issues in the investment-grade Bloomberg-NASD bond index. 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 within the next six months.
``You're lifting the veil of ignorance,'' said Peter Campfield, head of taxable fixed-income trading at San Francisco- based Charles Schwab Corp., 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.''
Big and Small
The bond-trading business has been a loser for big banks as well as boutiques like Seifer's Bernard Richards Securities Inc. In May, Albany, New York-based First Albany Cos. cited ``a changing environment and continued declines in taxable fixed- income corporate bond revenue'' for abandoning bond trading.
In February, New York-based Merrill Lynch & Co., 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-fourth 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 Inc., 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 Group Inc. ``We have several faithful analysts who still follow us, but the number of investment-grade research analysts is shrinking.''
Lost $1 Billion
Securities firms are jettisoning corporate bond staff because they're not generating as much money. Bond traders lost $1 billion in fees from mid-2002 to mid-2003, or about $2,000 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 55 cents per $1,000 in bonds for General Electric Co.'s 5 percent note maturing in 2007 to $2.10 for Johnson & Johnson's 3.8 percent note due in 2013, according to Trace.
Seifer's firm, housed in a neo-Renaissance building, had a 5,000-square-foot 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 such places as 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 Corp. in New York. ``Some of us would walk away with upwards of $1 million, but we provided a service that large firms can't provide for accounts. What gives the NASD the right to say it's wrong to make $1 million trading bonds?''
More Efficient
The Trace system wasn't intended to drive anyone out of business or reduce the amount of money anyone makes, said Douglas Shulman, vice chairman of the NASD, formerly known as the National Association of Securities Dealers.
``Our goal was to improve the overall quality of the bond market, and we think we have achieved that,'' Shulman said. ``Changing from an opaque market to a transparent market makes markets more efficient, and better for all players in the long run. But it's inevitable that some players are going to make less money than they did before Trace.''
The Bond Market Association, a New York-based trade group that represents bond underwriters and dealers, says Trace cut trading of corporate debt because dealers aren't being compensated.
``There have been reduced transaction costs, but the question is, `Has it gone too far?''' said Randy Snook, executive vice president of the BMA and former co-head of debt syndicate at Goldman Sachs Group Inc. in New York. ``In some markets, by their nature, traders are less willing to commit capital.''
Business Renamed
The outlook is so gloomy that some banks don't even call it the corporate bond department anymore. Frankfurt-based Deutsche Bank AG and other firms renamed the business ``credit,'' a nod toward faster growing derivatives markets.
The NYSE, which set up a nascent automated bond trading system in 1976, is increasing its listings. The Big Board expects the difference between the bid and ask prices for bonds traded on the exchange to be $1.25 per $1,000.
In the equity market, the minimum price change for stocks traded on the NYSE narrowed to 1 cent from 6.25 cents in January 2001, when the exchange switched to decimal pricing from fractions.
``We are bringing the stock market to the bond market,'' said John Holman, who is leading the NYSE's effort to list and trade more than 4,000 debt securities. ``The fixed-income market is just 20 years behind.''
Derivatives Expand
The hot markets today are derivatives, or financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
One type, credit-default swaps, allows investors to bet on the ability of companies to repay their debt without buying bonds. The market for credit-default swaps has more than doubled in the past year to cover $26 trillion of securities, according to the International Swaps and Derivatives Association.
``The more experienced corporate bond traders are being moved into the credit derivatives and structured credit space to handle increased demand for those products,'' Option Group's Karp said.
One of Seifer's former employees, Bill Fecci, who turned in his carpenter's union card 10 years ago to become a corporate bond salesman, is back to hanging sheetrock on weekends to make ends meet.
The 40-year-old broker at Seidel & Shaw LLC in New York says his job on Wall Street will be eliminated by year's end.
``The future of this business is bleak,'' Fecci said last week in an e-mail from a building site in Staten Island, New York. ``Your opponent basically knows your cards and you basically know his. You don't win very much, nor does he lose very much, and the exchange goes on without a net winner.''
To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net .
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