The Bond Markup Nobody Questioned
A retail client buys $250,000 face value of a corporate bond from a dealer at a price of 101.75. The dealer acquired the bonds 20 minutes earlier at 100.10 from another dealer. The bond is investment grade, has a stated market of roughly 100.15–100.25, and trades in reasonable size. The dealer's markup policy sets a presumptive cap of 1.0 point for retail-sized investment-grade trades, with exceptions requiring supervisory sign-off and a written rationale. The ticket shows no sign-off. The client is a retiree with a moderate risk profile and a stated objective of income preservation. The dealer's file notes only 'market conditions' as the rationale for the price.
1. Evaluate whether the markup is consistent with fair dealing and best execution obligations.
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The markup is roughly 1.65 points over the dealer's contemporaneous acquisition cost and about 1.5 points over the prevailing market. That exceeds the firm's own 1.0-point presumptive cap and lacks the required supervisory sign-off and written rationale.
Fair dealing in fixed income requires that the price be fair relative to the market and that the dealer's compensation be reasonable in light of the services provided and the risks borne. A 20-minute hold with no market movement carries minimal risk, which weakens any justification for a markup above the cap. 'Market conditions' is a conclusory label, not a rationale; it does not explain why this bond, this size, and this client warranted an exception.
The best execution analysis is separate but points the same way: the dealer should be able to show it obtained a fair price given the bond's market. Here the contemporaneous interdealer trade is strong evidence of what a fair price looked like.
2. What additional facts would you want before concluding a breach occurred, and why do they matter?
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Several facts could change the analysis:
- Size and liquidity: if $250,000 was large relative to the bond's typical trading size, some compensation for risk is defensible - but the dealer held for 20 minutes, so inventory risk was negligible.
- Whether the client was given a disclosure of the markup or a net-price presentation.
- Whether the bond was subject to a new-issue concession or special demand.
- Whether the firm's cap is a hard rule or a genuine presumption, and what the firm's written exception process requires.
- Whether the client had alternatives and whether the dealer disclosed that it was acting as principal.
These matter because the core question is reasonableness, which is fact-dependent. The absence of sign-off is a procedural breach on its own, but the substantive fairness question turns on the risk and service actually provided.
3. The client later complains. How should the firm's supervisory and remediation response be structured?
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The firm should first preserve the records: the ticket, the interdealer confirm, timestamps, the client's account profile, and any communications. It should then conduct a documented review of whether the price was fair and whether the exception process was followed.
If the markup exceeded policy without approval, the firm should remediate the client - typically by adjusting the price or crediting the excess - and review the dealer's other trades for a pattern. A single ticket is an error; a pattern is a supervisory failure.
The response should also address the suitability dimension: a retiree seeking income preservation was sold a bond at a price that eroded yield. That does not automatically make the bond unsuitable, but it reinforces the need for a documented suitability rationale.
Finally, the firm should fix the control that failed - e.g., a hard block on above-cap markups without supervisory approval - rather than relying on after-the-fact review.