May 24, 1999
Investors Show Little Interest
In Trading Bonds on the Web
By ANDREW FRASER
THE WALL STREET JOURNAL INTERACTIVE EDITION
Bond trading over the Internet may have come a bit too soon for individual investors.
It appears not many are jumping at the chance even though Web brokerage firms are clamoring to offer them the opportunity to buy and sell bonds over the Net -- just like they do stocks.
Internet brokerage firms such as E*Trade Group Inc., Charles Schwab Corp. and Discover Brokerage Direct, the online arm of Morgan Stanley Dean Witter & Co., have all launched or upgraded online systems for bonds recently. They are among 27 firms, most catering to professionals, that offer electronic bond trading.
The brokerage firms bringing bonds to the Net believe they are at the dawn of a potentially big phenomenon. They are betting that bonds will duplicate the stunning success of online stock trading, which has quickly become a bustling artery to Wall Street.
But with the stock market booming and interest rates low, Web brokers are having a tough time luring cyber investors, who typically are young and aggressive, and are chasing after the bigger gains that stocks offer. To these investors, bonds are way out on the horizon.
Even though they are trying to put up a positive face on the performance of the fledgling business -- saying they are pleased with the results or that the business is growing -- executives at some firms acknowledge that investors have been slow to embrace their online bond-trading services.
"Of course it's not going open up and immediately break records," says Charles Almond, president of Bond Exchange (www.bond-exchange.com), one of the innovators. "It might take three years for bond trading, just like it took for equity trading."
Bond Exchange, which offers brokerage firms technology and services for online bond trading, records an average of just 79 trades a day on its system. The Mill Valley, Calif., firm's main client is E*Trade, which has declined to disclose performance numbers for its bond business.
Doug Doyle, director of product marketing for Palo Alta, Calif., E*Trade, acknowledges business was slow initially because the firm first tested the service with just a small portion of its roughly one million customers. But Mr. Doyle says he is pleased with the progress, despite numbers from Bond Exchange that would indicate a slow going.
Nevertheless, other brokers admit experiencing tepid interest. At Discover Brokerage Direct in San Francisco, bonds account for only 1% of the firm's online trading, according to president and chief operating officer, Thomas O'Connell. Nevertheless, Mr. O'Connell projected that figure will rise to more than 10% in coming years as the U.S. stock market's decadelong rally wanes.
Online brokerage executives believe they are at the dawn of a phenomenon. They say the mostly young, computer-trading set eventually will evolve to fit the profile of the typical bond investor -- older, risk-averse, aware of tax consequences and looking for a steady income stream. These investors, they are betting, will start investing in bonds online as their wealth grows and as they look to preserve it.
"You could have written the same article in December 1996 for stocks," says John Ladensack, general manager of the bond business at discount broker Charles Schwab in San Francisco. "It's in spring training," he said, using a baseball metaphor. "It's only small compared to what it will be in the future, that's for sure."
And analysts agree. Forrester Research in Cambridge, Mass., expects online fixed-income assets to grow to $306 billion by 2003, up from nearly zero in 1998. Moreover, the Tower Group in Needham, Mass., expects 17% of all fixed-income transactions will be electronic by 2001.
Although Web brokers have been reluctant to reveal hard numbers about the growth of their online bond businesses, there are lots of hints that bond trading hasn't shot out of the starting gate.
One pioneer in the race to popularize bond trading over the Net already has scaled back operations and another has resorted to offering incentives for new accounts -- even though competition still is scarce.
BondTrac (www.bondtrac.com), an Oklahoma City bond-listing service catering to professionals, earlier this year began to target individual investors, but response was cool. The service used the Web to provide a list of thousands of bonds, their prices and the brokers who were selling them. But many of the brokers, who were aiming to drum up business, told BondTrac the listings on its Web site didn't lead to more sales, and the company has since cut back on the service.
"We determined it really is not time yet," said Thomas Hannon, the chief operating officer of BondTrac. "You've got a very strong stock market and a weak bond market and that's against us." Moreover, he said, individual investors don't seem comfortable analyzing and buying bonds on their own.
To drum up business, BondAgent (www.bondagent.com), the first pure online bond broker targeting individual investors, has been giving customers incentives to open new accounts. The firm is offering $50 and $100 gift certificates -- depending on the size of the account -- for Virtual Vineyards, an online retailer of gourmet foods and wines. It had offered cash in March and April.
"People weren't rushing to buy bonds online anywhere," says Michael Morgan, president of the company, which is based in Coeur d'Alene, Idaho. "It is a budding industry." Mr. Morgan says business has picked up since the incentives were offered, but he declined to provide specific numbers.
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