Recently, Securities and Exchange Commission (SEC) Chair Mary Jo White announced a plan to transform the fixed income markets by promoting price competition, improving market efficiency, and facilitating best execution.
Currently, the municipal bonds market is fragmented, with tens of thousands of issuers but nothing which resembles a centralized exchange. Although the corporate bond market is more centralized and consistent than its municipal counterpart, it still is unfair to the average investor who lacks an easy way to find information about price quotes. Because of the difficulty and inconsistency of these markets, bonds are generally traded far less frequently than stocks.
The plan centers on making pricing information in the corporate and municipal-bond markets easier to acquire. In the current markets, such data are challenging to obtain for the average investor, empowering market intermediaries such as Wall Street banks.
The push for an increase in transparency in bond trading has been a focus of the SEC for years. According to a landmark report by the SEC in 2012, there are over 40,000 corporate bond issues outstanding, totaling approximately $11.3 trillion in principal amount, and more than one million municipal bond issues outstanding, representing about $3.7 trillion in principal amount.
“Trading in these massive fixed income markets remains highly decentralized, occurring primarily through dealers where costs of intermediation are much more difficult to measure,” said White.
“I am therefore concerned that in the fixed income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries.”
White announced that the SEC is beginning an initiative to start forcing electronic dealer networks, such as alternative trading systems, to disseminate publicly their best prices for corporate and municipal bonds.
White’s proposed reforms have received praise from several industry experts. According to Vikram Rai, a fixed-income strategist at Citigroup, “anything that can improve transparency will increase the comfort and the confidence that investors have in the market.”
Advances in technology in the past several years has been a huge benefit to the stock market and the enablement of average investors to trade more effectively. However, White believes that within the bond market, these advances have had less of an impact for investors.
“I am therefore concerned that, in the fixed-income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries, and its potential to achieve more widespread benefits for investors, including the broad availability of pretrade pricing information, lower search costs and greater price competition, especially for retail investors, is not being realized,” White said.