Ronald Fink is a senior editor at CFO.
While critics of the SEC chairman would argue that much of his record deserves anything but praise, Arthur Levitt has an impressive list of accomplishments to show for his first five-year term:
- Added representatives of investors and others from outside the securities industry to the board of the NASD.
- Convinced the municipal-bond industry to accept a ban on most campaign contributions.
- Created a commission to prevent conflicts of interest at accounting firms that also engage in management consulting.
- Created a commission that proposed ways to reduce conflicts between Wall Street and investors, such as compensating brokers other than for their trading volume.
- Sought and won accounting standards for derivatives.
- Helped put more representatives of investors on the board of the Financial Accounting Foundation.
- Encouraged the use of alternatives to traditional securities-underwriting methods.
- Convinced the New York Stock Exchange to ease its rules for delisting securities.
- Oversaw the move to securities pricing based on decimals.
What’s a Bond Really Worth?
While the Securities and Exchange Commission cracked down on the National Association of Securities Dealers over allegations of price fixing, the nation’s top securities cop seems less concerned about allegations of price collusion among bond dealers.
Consider the case of InterVest Financial Services Inc., a Philadelphia-based electronic trading system for bonds. The InterVest system is designed to help bond investors get a range of price quotes from dealers on any given issue, which is currently quite hard to come by. Unlike stocks, bonds are not listed on exchanges. All trading is handled by dealers representing buyers and sellers. And because investors have no effective means of comparing bid and asked prices, dealers’ spreads are suspected of being much wider than they would otherwise be.
Larry Fondren, founder and CEO of InterVest, estimates that the difference amounts to at least $15 billion a year, and believes the figure is probably many times that amount, considering that an estimated $60 billion in corporate bonds changes hands every day in the United States — dwarfing the value of stocks traded daily here.
After winning SEC approval of its system in 1992, InterVest arranged to provide access to its customers through Bloomberg LP’s financial data network. But InterVest has had an extremely hard time getting dealers to participate, because of its transparency. And after InterVest announced in January that it would offer a new service that would let issuers market bonds directly to the public, Bloomberg canceled its agreement with InterVest.
Why? Bloomberg isn’t saying. But Fondren suspects pressure from dealers, noting that the country’s largest dealer, Merrill Lynch, has a 20 percent stake in Bloomberg. So he has asked the Justice Department’s antitrust division and the SEC’s division of market regulation to investigate.
Neither Justice nor the SEC will comment on the case, but Fondren says his complaints have fallen on deaf ears. “Justice told me that unless I can show that a bunch of bond dealers were sitting around in a room together, they won’t have enough to go on.” He says he got much the same response from the SEC.
However, federal regulators may soon have significantly more to work with besides Fondren’s complaint, and it would come from a source that has proven extremely helpful in the past. The Nasdaq price-fixing scandal was the direct result of research on that market by academics Paul Schultz and William L. Christie. At Fondren’s urging, Schultz, now a finance professor at the University of Chicago, has agreed to undertake a similar study of spreads in the corporate bond market, using trading data supplied by life insurers, which are the biggest holders of corporate issues. —R.F.