The U.S. Securities and Exchange Commission wants more public information on privately negotiated prices in the bond markets as the regulator seeks to increase fairness for smaller investors, Chair Mary Jo White said.
“This potentially transformative change would broaden access to pricing information that today is available only to select parties,” White said in prepared remarks delivered today at a speech before the New York Economic Club in Manhattan. New rules may help by “promoting price competition, improving market efficiency and facilitating best execution.”
The practice of dealers showing clients different prices for the same securities on electronic bond-trading platforms has drawn SEC scrutiny. The agency is concerned that smaller investors are being penalized, a person with direct knowledge of the inquiry said in March.
White’s proposal would apply to corporate and municipal debt, she said. The SEC is “very focused” on making changes in market structure in the “next year or two.”
“We balance what we’re trying to accomplish to the benefit of investors with market impacts,” she said during a question-and-answer session after the speech. While her agency takes into account economic and legal factors and public comments, she said, “clearly regulation has costs associated with it, and that’s a necessary part of it.”
The nine largest global investment banks posted more than $75 billion in fixed-income trading revenue in 2013, excluding accounting charges, led by JPMorgan Chase & Co.’s $15.5 billion. Last year’s total for the biggest banks was just more than half the revenue they produced in 2009, according to industry analytics firm Coalition Ltd.
The SEC will work with the Financial Industry Regulatory Authority and the Municipal Securities Rulemaking Board to finalize a so-called best-execution rule for municipal bonds and to develop regulations around disclosure of markups in the muni and corporate-bond markets, she said.
Government agencies have been more closely examining transactions that traditionally occurred over the telephone in a U.S. debt market that’s almost doubled in the last decade to $40 trillion, attracting record cash from the growing population of retirees.
Bonds aren’t traded as frequently as stocks, which are typically listed on exchanges. Some will rarely change hands, making it difficult for buyers and sellers to determine market prices.
The SEC is separately examining to what extent smaller buyers are disadvantaged and whether the behavior constitutes market manipulation, Bloomberg News reported in March. Brokers can choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off.
Finra is expanding its bond-price reporting into the $1.5 trillion market for private company debt, which is only sold to institutional buyers. The plan extends the reach of a system introduced in 2002 into an area more likely to be rife with questionable practices because the securities are less frequently traded.
It’s historically been more profitable to trade bonds than stocks because the debt markets are less transparent, making it easier for brokers to take a bigger fee for each exchange.
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