Who Trades Bonds? Dealers, Platforms, and Investors

Retail investors pay 0.5-1.5% in transaction costs on typical bond trades. Institutions pay 0.05-0.15%. That's a 5-10x cost disadvantage before you earn a single coupon payment (Coalition Greenwich, 2024). The bond market operates nothing like the stock market you know, and understanding who trades bonds and how they do it determines whether you capture yield or surrender it to the bid-ask spread.

The practical antidote isn't avoiding bonds. It's understanding the dealer-intermediated market structure, knowing when to use platforms versus brokers, and sizing positions large enough that transaction costs don't consume your income advantage.

Why Bond Markets Work Differently (The OTC Reality)

When you buy Apple stock, your order goes to an exchange where it matches with a seller at a transparent price. When you buy an Apple bond, you call a dealer who quotes you a price from inventory. There's no central exchange. No publicly displayed order book. Just you, a dealer, and whatever spread they decide to charge.

The structure difference:

• Stocks: Exchange-traded, continuous pricing, narrow spreads (pennies)
• Bonds: Over-the-counter (OTC), dealer-quoted, wide spreads (dollars per $1,000)

Why this matters: 30,000+ distinct corporate bonds exist versus a few thousand actively traded stocks (FINRA, 2024). Most bonds trade once or twice per week on average. The typical large-cap stock trades thousands of times daily. This fragmentation means dealers hold inventory, take risk, and charge spreads for providing liquidity you can't find on an exchange.

The durable lesson: Bond markets reward patience and scale. Small, frequent trades in individual bonds destroy returns through accumulated spreads.

Primary Dealers (The Market's Backbone)

24 primary dealers serve as the Fed's counterparties and dominate Treasury trading (Federal Reserve Bank of New York, 2024). These firms are required to bid at Treasury auctions and make markets for the Fed's official accounts.

What primary dealers do:

• Bid at every Treasury auction (pro-rata, at competitive prices)
• Trade $545-944 billion weekly in Treasuries
• Hold inventory to provide immediacy to customers
• Finance institutional bond purchases

The names are familiar: Goldman Sachs, J.P. Morgan, Morgan Stanley, Citi, Bank of America. They're the wholesalers of the bond market. When BlackRock needs to buy $500 million in Treasuries, they call primary dealers (or increasingly, use electronic platforms).

The capacity constraint: Treasury debt outstanding grew 176% since 2012 to $22.9 trillion. Primary dealer intermediation grew only 80% over the same period (Boston Fed, 2024). Regulations designed to make banks safer have constrained their ability to warehouse bonds. The result: less dealer capital absorbing customer imbalances, more reliance on matching buyers with sellers directly.

Why this matters to you: During market stress (March 2020), dealers couldn't absorb selling pressure. Transaction costs spiked 38% in bonds where investors stopped providing liquidity. The Fed stepped in as "market maker of last resort" (Journal of Economic Perspectives, 2025).

Electronic Platforms (The New Middlemen)

Nearly 50% of investment-grade corporate bond trading now happens electronically (Coalition Greenwich, 2024). This is a revolution from the phone-based dealer market of a decade ago.

The major platforms:

How Request-for-Quote (RFQ) works:

1. Institution sends trade request to multiple dealers simultaneously
2. Dealers compete to offer best price
3. Institution executes with winning dealer
4. Entire process takes seconds, not phone calls

Portfolio trading has transformed execution. Instead of trading bonds one at a time, institutions now package hundreds of bonds into single trades. Tradeweb handles 67% of electronic portfolio trading volume. The benefit: execution costs drop over 40%, with the largest savings on illiquid bonds.

The practical point: Electronic platforms exist primarily for institutions. Retail investors generally access bonds through broker-dealers who may (or may not) source from these platforms. Ask your broker how they execute bond trades and whether they provide RFQ competition.

The Three Tiers of Bond Liquidity

Not all bonds trade alike. Understanding the liquidity hierarchy prevents costly mistakes.

Tier 1: Treasuries (Most Liquid)

• $27+ trillion outstanding
• Trades daily in massive size
• Bid-ask spread: ~11 cents per $100 par value
• Settlement: T+1 (next business day)

Tier 2: Investment-Grade Corporates (Moderately Liquid)

• 30,000+ distinct securities
• Many trade 1-2 times per week
• Bid-ask spread: ~21 cents per $100 par value
• Electronic trading growing rapidly

Tier 3: High-Yield, Municipals, Small Issues (Least Liquid)

• Trade infrequently (some bonds go weeks without trading)
• Bid-ask spread: 22+ cents per $100 par value (MSRB, 2018)
• Retail transaction costs historically averaged over 2%
• Significant improvement since TRACE/EMMA transparency

The test: Before buying any bond, check how often it trades. If it trades less than daily, factor in wider spreads and potential difficulty exiting.

The Retail Disadvantage (And How to Mitigate It)

Here's the uncomfortable math. You buy a $10,000 corporate bond. The dealer marks it up 1% from where they bought it. That's $100 gone immediately. You sell later; they mark it down 0.5%. Another $50 gone. Round-trip cost: $150 on a position earning maybe $500/year in coupons. You surrendered 30% of your first year's income to transaction costs.

Why retail pays more:

• Small trade sizes mean less negotiating leverage
• Dealers embed higher markups in retail quotes
• No access to inter-dealer competition (RFQ)
• Less price information than institutions

The transparency improvement: Since May 2018, FINRA requires brokers to disclose mark-ups on retail trades as both dollar amounts and percentages of prevailing market price. Research shows mark-ups now reside in a tighter range (FINRA, 2024). Check your trade confirmations.

The practical antidote:

Before trading individual bonds:

1. Check FINRA TRACE (corporates) or EMMA (municipals) for recent transaction prices
2. Compare your quoted price to inter-dealer trades
3. Get quotes from multiple brokers if possible
4. Consider whether an ETF achieves your goal at lower cost

Position sizing rule: Keep individual bond positions at $25,000+ to ensure transaction costs stay below 0.5% round-trip. Below that threshold, bond ETFs typically offer better economics.

Detection Signals (When You're Paying Too Much)

You're likely overpaying for bond execution if:

• Your trade confirms show mark-ups above 1% consistently
• You can't find your bond's recent prices on TRACE/EMMA (it doesn't trade often enough)
• Your broker can't explain how they source bond inventory
• You're buying individual bonds in under $25,000 lots
• You're frequently trading (not holding to maturity) individual bonds

Mitigation Checklist (Tiered)

Essential (high ROI)

These four actions prevent most retail execution problems:

1. Check TRACE/EMMA prices before accepting any dealer quote
2. Size individual bond positions at $25,000+ minimum
3. Use bond ETFs for positions under the threshold (lower spreads, daily liquidity)
4. Review trade confirmations for disclosed mark-ups

High-Impact (for active fixed income investors)

For investors building meaningful bond allocations:

1. Establish accounts at 2-3 brokers to compare quotes
2. Learn to read bid-ask spreads on TRACE data
3. Understand your broker's execution practices (do they use RFQ?)
4. Consider Treasury direct purchases at TreasuryDirect.gov (no spread)

Optional (for larger portfolios)

If you're managing $500,000+ in fixed income:

1. Explore separately managed accounts with institutional execution
2. Investigate platforms offering retail access to competitive pricing
3. Negotiate execution quality with your broker

How Liquidity Affects Your Returns

A useful cost chain: Small position size (higher spread %) + Illiquid bond (wide bid-ask) + Dealer markup (retail disadvantage) = Transaction costs exceeding yield advantage

The calculation:

• Corporate bond yield: 5.5%
• Treasury yield: 4.0%
• Yield advantage: 1.5%
• Round-trip transaction cost on $10,000: 1.5%

Result: Your entire first-year yield advantage goes to the dealer. You're earning Treasury returns with corporate credit risk.

The fix: Either size up to $50,000+ where round-trip costs fall to 0.3-0.5%, or use a corporate bond ETF where you access institutional execution and diversification.

Related Concepts (Use These to Think Clearly)

Bid-ask spread: The dealer's profit margin. Tighter spreads mean more efficient execution.

TRACE: FINRA's Trade Reporting and Compliance Engine. Your window into actual transaction prices for corporate bonds.

RFQ (Request for Quote): How institutions shop dealers electronically. Creates competition that tightens spreads.

Portfolio trading: Packaging many bonds into single trades. Cuts costs dramatically on illiquid bonds.

Mark-up disclosure: Post-2018 requirement that brokers show their profit on retail trades.

Next Step (Put This Into Practice)

Before your next bond purchase, check the prevailing market price on TRACE.

How to do it:

1. Go to FINRA's TRACE data at finra-markets.morningstar.com
2. Search by CUSIP or issuer name
3. Review trades from the past 5 business days
4. Note the inter-dealer prices (where brokers trade with each other)

Interpretation:

• Your quote within 0.25% of recent inter-dealer trades: Fair execution
• Your quote 0.5-1% away: Negotiate or find another broker
• Your quote 1%+ away: You're being overcharged (unless it's a very illiquid bond)

Action: If your broker consistently quotes 1%+ away from prevailing prices, move your fixed income business. Transaction costs compound just like returns, except they work against you.

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References

Source: Harris and Piwowar (2006) found that retail municipal bond transaction costs averaged over 2% per trade, with smaller trades incurring significantly higher proportional costs.

Coalition Greenwich. (2024). US Corporate Bond Trading in 2024 By the Numbers.

Federal Reserve Bank of Boston. (2024). The Effect of Primary Dealer Constraints on Intermediation in the Treasury Market.

Federal Reserve Bank of New York. (2024). Has Treasury Market Liquidity Improved in 2024?

FINRA. (2024). TRACE Overview and Academic Corporate Bond Data.

Journal of Economic Perspectives. (2025). The US Corporate Bond Market: Evolution, Structure and Vulnerabilities.

MSRB. (2018). Transaction Costs for Customer Trades in the Municipal Bond Market.