The U.S. Department of Justice (DOJ) this week confirmed that it’s investigating the online bond trading and online foreign exchange industries.
“The antitrust division is looking at the competitive effects of certain joint ventures,” said DOJ spokeswoman Gina Talamona.
Officials in the brokerage industry earlier this month reported that some financial services firms had received letters from the DOJ asking for information about their online bond trading plans. Merrill Lynch & Co. and New York-based BondBook LLC, which is one of three major online bond trading exchanges set up with the backing of various brokerages, both said they had been contacted by the DOJ.
“We intend to fully comply with the inquiry,” said Joseph Cohen, a spokesman at New York-based Merrill Lynch & Co. Inc., which is a backer of BondBook.
According to BondBook spokesman Steve Van Anden, the government’s letter sought a range of information about the bond exchange’s business model and organizational structure. “It was very broad in scope,” he said.
But it remains unclear how widespread the investigation will be. The DOJ wouldn’t provide any specific details into either investigation.
Like Merrill Lynch, major New York-based brokerages such as The Goldman Sachs Group Inc., Morgan Stanley Dean Witter & Co. and Citigroup Inc. subsidiary Salomon Smith Barney Holdings Inc. are backing the various bond trading systems developed by BondBook and its rivals.
Analysts said they aren’t sure exactly what the DOJ hopes to accomplish with the investigation.
“It seems to me that it’s late in the game for the Justice Department to discover that the bond market is a collusive environment,” said Deborah Williams, an analyst at Meridien Research Inc. in Newton, Mass. “It’s dominated by a very few key specialists.”
In fact, Williams said, the emerging online markets may actually be more open than the traditional ways of doing business. “From our research, there’s potential . . . for some of the new systems to really open up the bond market,” she said, adding that greater price transparency could be one of the positive benefits.
There haven’t been any signs that the operators of online bond exchanges have been taking unfair advantage of new online marketplaces, said Larry Tabb, an analyst at TowerGroup in Needham, Mass.
However, he added, there’s a worst-case scenario in which bond dealers create a stranglehold on the market and then use it to shut out their competitors and collude on prices. That could help them artificially widen spreads on the trading of bonds, which Tabb said would put more money in dealers’ pockets and leave less for individual investors.
