Here’s how much your broker makes when you buy a bond

Personal finance

When a broker-dealer buys or sells bonds for investors, it can either trade the bonds from its own inventory or it can trade in the open market for you.

If your broker arranges a bond trade in the open market, then you receive a disclosure that shares the details on the transaction costs you paid.

However, if your broker trades the same exact bond out of the firm’s own inventory in what’s known as a “principal trade,” there is no requirement that you receive a disclosure of your transaction fees — until now.

These transaction fees or “spreads” are tacked onto the price of the bond: In a principal trade of $100, you might just see that you’re paying $102 for the security. If you sell it back to the firm, you’re getting back $98.

“You don’t see that $2 markup or markdown, you just see that that you bought or sold it for that price,” Hauptman said. “Now, firms have to show you the percentage and real dollar amount of what the bond costs to trade.”

Under the new rule, consumers receive the disclosure after the trade.

“We’d like to see pre-trade transparency so that you know what the markup or markdown will cost and you can compare different broker-dealers,” Hauptman said.

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