Brokers/dealers inventory

For example, a major full-service broker/dealer offering online execution from its own inventory of municipals would list just two New York tax-exempt issues available for purchase online. This went against the preferences of the traditional bond investor, who is looking for diversification, as well as the preferences of the online investor, who seeks convenience, efficiency, and lower costs. 

Intermediaries are usually reluctant to offer securities if they do not have them in inventory. Exceptions are highly liquid issues, where the dealer is confident he can obtain the bonds via the interdealer broker market. Generally, Eurobond dealers are more willing than their US counterparts to make short offerings, that is, to sell bonds they do not have in inventory. This mostly reflects the more competitive nature of the market—there are more dealers with smaller market shares than in the United States. But with the market s increased volatility short offerings are less common, and the US-style order system is becoming more prevalent. 

Dealers, often brokerage firms with large retail investor customer bases, purchase bonds in the wholesale or institutional marketplace in bulk. Once acquired, the large bond position must be subdivided and sold to numerous investors. If not all of the bonds can be sold immediately, the broker will hold the bonds in inventory until the position is completely liquidated. The dealer can inventory the bonds anywhere from a day to a few months, and this is the reason that retail bond spreads tend to be large. There is always the risk that the broker may have to hold the bonds in inventory for an extended period of time— hence, a large spread is typically "built" into the price. 

These inventory systems provide dealers and online brokers, whose online presence may be negligible or nonexistent, a ready-made, cost-effective system for offering bonds online. Full -service dealers can also deploy the commingled system... 

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