Bond Broker: What it is, What They do, Certifications

What Is a Bond Broker?

A bond broker is a broker who executes over-the-counter (OTC) and listed bond trades on behalf of investors or traders. Bond brokers act as intermediaries between buyers and sellers of debt securities, keeping the identities of both parties at the end of the transaction anonymous, and earning a commission for their services. Brokers often communicate with traders online or over the telephone in order to obtain quotes from counterparies to a trade.

Understanding Bond Brokers

Purchasing Treasury securities does not require the services of a bond broker as this can easily be done through the online Treasury platform called Treasury Direct. However, to purchase municipal bonds and corporate bonds, investors must do so through a broker. A bond broker, then, is an intermediary between buyers and issuers or sellers of bonds.

The broker trades bonds on the trading floor of an exchange or in the over-the-counter (OTC) markets and buys and sells bond securities on behalf of investors in exchange for commissions. Bond brokers make money off the spread at which they exchange bonds between traders, and take little risk in the process since brokers typically do not hold long or short positions in bonds. For example, if a broker purchases a bond for $98 and sells it for $99, they earn a spread of $1 on the transaction.

Bond Market Considerations

There is a lack of price transparency for bonds, compared to the prices for equity securities. Bond brokers may take advantage of this fact by marking up the bond’s price. A markup is when a broker buys a bond at a low price, then shortly thereafter resells it to an unaware customer at a higher price. The broker makes their money from the spread of the buy and sell transaction.

While bond brokers are entitled to a 1%-2% markup for their trading services and discretion, the spread might be too excessive (if greater than 5%), creating a conflict of interest between a bond broker who wants to sell bonds at a high price and a client who wants to buy them at a low price. Since commission costs and the size of the markup are hidden, an investor must ensure that they are informed and knowledgeable about the bond and the price range in which the bonds should be trading.

Though bond brokers play a key role in maintaining the anonymity of buyers and sellers in the bond market, as computer systems advance, some of these duties have become obsolete. As for now, human interaction still plays an important role in much of bond trading.

Bond Broker Certifications

One major requirement before someone can become a bond broker is to pass the General Securities Representative Exam, commonly called the Series 7 exam, which is offered by the Financial Industry Regulatory Authority (FINRA) and allows brokers to engage in the purchase and sale of securities.

Before the exam can be taken, the candidate in question has to be sponsored by a broker/dealer firm. This requirement makes it necessary for anyone who desires to be a broker to first seek an internship or employment with a brokerage firm. After Oct. 1, 2018, Series 7 candidates will also have to take the Securities Industry Essentials exam before sitting for the Series 7.

Additionally, most states require brokers to take the Uniform Securities Agent State Law Examination, commonly known as Series 63. As the name suggests, the exam deals with the laws and regulations of the state that govern financial securities.