How bond market makes millionaires

Bond trading is churning out a fresh crop of millionaires as traders in commercial and investment banks engage in smart, at times unethical practices to make a killing.

Investigations by The EastAfrican have revealed that the business is so lucrative that in a matter of months, traders, most in their 20s and 30s, make more money than a formal employment in a blue chip firm could have earned them for many years.

The deals are not illegal — merely taking advantage of loopholes in the system to rake in thousands of dollars.

One broker in an investment told The EastAfrican, the tricks brokers use in the market to ensure to make a killing.

“If you know someone wants to buy a pen at Ksh15 ($18 cents) and you know where you can get it at Ksh10 ($12 cents), would you not buy it and sell it at Ksh15 ($18 cents)? That is what happens in the market. There is nothing illegal about that. It is arbitrage, even the Governor (of the Central Bank) said it was legal,” the stockbroker said.

But The EastAfrican has learnt that traders acting as the intermediaries between a buyer and a seller, the trader sometimes gets the representative of the seller to give him or her the “pen” at a lower price, promising to split the difference as a kickback.

The trader thereafter goes to yet the representative of the buyer, and persuades them to buy the “pen” for Ksh20 ($23 cents) instead of Ksh 15 ($18 cents), also promising to split the difference.

In bond trading, the same logic applies but the figures are in hundreds of millions of Kenyan shillings and the kickbacks are in hundreds of thousands shillings for just one deal.

The parties involved are usually one bank as a buyer and another as the seller, with the investment bank playing the role of go-between.

It is at this point that some traders in investment banks collude with traders in the banks, selling the bonds at a price that allows them to earn more than a handsome commission.

Apparently, because the Kenyan bond market is not yet developed to the level of having dealers licenced by the Capital Markets Authority or Central Bank — whose role would be to sniff for an opportunity in the bonds market, find sellers to give them a good price, and find a willing buyer to take the bond off them — traders have filled this gap.

Some commercial banks who spoke to The EastAfrican said they stopped dealing with the certain brokers because sometimes they (brokers) back out of deals.

“We stopped dealing with some of the investment banks because of these issues,” said a banker, who requested not to be named.
Source: The EastAfrican, http://www.theeastafrican.co.ke, reported by Emmanuel Were in Nairobi Kenya
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