Bond Broker

A bond broker is a financial intermediary who facilitates the buying and selling of bonds between parties in the fixed income market. Most bonds do not trade on exchanges the way stocks do. They trade over the counter, between dealers and investors who negotiate prices directly. Bond brokers connect those counterparties and provide the price discovery the market would otherwise lack.

Think of a bond broker as a matchmaker in a market where the buyers and sellers would never otherwise find each other.

Three Types of Bond Brokers Serve Different Markets

The bond brokerage world divides into three categories based on clientele.

• Interdealer brokers. These firms connect dealer banks with other dealer banks. They operate anonymously so large institutions can execute trades without exposing their positions to competitors. Interdealer brokers are the plumbing of wholesale government and corporate bond markets.
• Institutional brokers. These brokers serve pension funds, insurance companies, and other large investors. They execute large block trades and provide market intelligence on pricing and liquidity conditions.
• Retail brokers. These brokers work directly with individual investors and help them access the municipal, corporate, and agency bond markets.

Bond Brokers Make Money on the Spread

A bond broker earns revenue from the bid-ask spread, which is the difference between the price they pay to buy a bond and the price they receive when selling it. In highly liquid markets like U.S. Treasuries, the spread is tight. In illiquid markets like small municipal issues, the spread can be wide enough to meaningfully affect your return.

FINRA Rule 2121 governs fair pricing in bond transactions and requires that markups and markdowns be reasonable relative to the current market value of the security. The rule exists because retail bond buyers often lack access to real-time pricing information that would let them evaluate whether the price they received was fair.

You Need a Treasury Direct Account or a Licensed Broker to Buy Bonds

Individual investors can purchase U.S. Treasury securities directly through TreasuryDirect without using a broker. That option covers Treasury bills, notes, bonds, inflation-protected securities, and savings bonds.

Municipal and corporate bonds are different. They require a licensed intermediary. To sell bonds professionally, a broker must pass the General Securities Representative Exam, known as the Series 7, administered by FINRA. Since October 2018, Series 7 candidates must also pass the Securities Industry Essentials exam beforehand. Most states also require the Series 63 exam, which covers state securities law.

Sources:
https://www.acquire.fi/glossary/bond-broker-definition-fixed-income
https://en.wikipedia.org/wiki/Inter-dealer_broker
https://www.supermoney.com/encyclopedia/bond-broking
https://www.pimco.com/us/en/resources/education/everything-you-need-to-know-about-bonds