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Web Site Targets Small to Mid-Size Bond Traders

Tradebonds.com is less than a year old and has only eight employees, but the Newport Beach-based Internet startup is getting attention for its efforts to crack the huge bond market.

Tradebonds.com was created to be a one-stop shop for bond trading. A minimum of $25,000 is needed to open an account. Its brochure says investors save 1/8 to 2 points off the typical purchase price of a bond. Company president and CEO Ed Prado said Tradebonds.com is trying to carve a niche among small to mid-size customers in the bond market, such as smaller banks, credit unions, pension plans, money managers and high-net-worth individuals.

“A lot of people say this is an E*Trade play on bonds,” Prado said. “But E*Trade gets the mom-and-pop trader while bonds by nature are geared towards the more sophisticated end of the market. … We’re trying to create a B2B community that facilitates investment professionals to better manage their portfolios.”

Favorable Reviews

Thus far, Prado’s company has received favorable mentions in the press. Business Week, in a Nov. 15 article, said, “For purchases of up to 100 bonds, Tradebonds.com’s pricing is competitive with E*Trade’s. But for bulk buys, Tradebonds.com’s prices are far lower.” The Economist, in a Jan. 15 article, said, “None of the (big Wall Street) firms has gone as far in providing greater transparency as Tradebonds.com.”

Prado estimated that about 1% of the worldwide $14 trillion bond market is currently online and in five years, he believes that could increase to 40%.

“It just shows you the opportunity. There’s very little play on the Internet,” he said. “We’re a small firm and we see technology as our way of entering this market.”

Aiming High

Thus far, Prado said his web site is experiencing 350,000 hits and 9,000 bond queries a month. He declined to reveal the number of actual transactions, other than to say he wants it higher to get more leverage. His company’s aim by the end of the year is to have 700 users transact a year-end total of $250 million.

Also, Prado is in the process of closing its first round of VC funding, expecting to raise $5 million to $7 million. He declined to identify the potential investors.

Murray Rudin, who heads the Irvine office of VC firm Riordan, Lewis & Haden, doesn’t have an investment in Tradebonds.com but says he’s been impressed. He said the lack of a central clearinghouse, a la Nasdaq, makes bond trading inefficient.

“It’s kind of a dirty little secret of U.S. capital markets, which are in most other respects incredibly efficient. Tradebonds is creating over the web a much more efficient bond market, aggregating price info from numerous bond dealers and providing low-cost trade execution capabilities to small to mid-size investors. It’s a great idea,” Rudin said.

The bond market has been reluctant to put its services on the Internet, with some arguing that there isn’t enough trading available in certain segments to make it worthwhile, while others suggest it could become like day trading, with smaller investors getting into trouble. And, Prado said, the big brokers are slow to go to the Internet because it “cannibalizes their current sales force” and reduces commission income.

Feeling the Heat

But the big bond market traders are beginning to feel the heat and several recently have announced that they will establish online services. Meanwhile, Tradebonds.com already has competition, including BondAgent, Charles Schwab and E*Trade itself. Another online competitor could be Newport Beach-based BondSpectrum.com, which plans to focus on municipal bonds with its yet-to-launch web site.

Though only 31, Prado has plenty of experience in the bond market. He worked in the early 1990s as a bond trader for the Trading Desk, a Denver-based firm. He also worked managed bonds for Newport Beach-based Commerce Bank, which folded in 1993, and for US Central Securities, an Irvine-based fixed income firm that was acquired.

In 1995, he began his own broker dealership, Finacorp Securities, and on May 5 of last year, he began Tradebonds.com as a subsidiary of Finacorp. n

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