U.S. regulators are talking a closer looks at buy and sell
orders in the bond market, scrutinize trading and heighten their surveillance
of brokers’ markups on retail clients’ trades. Wall Street firms are pushing
back at those measures, which arrive decades after initial calls to protect
individual or “retail” investors from unreasonable charges in the $13 trillion
corporate, agency and municipal bond markets.
The Securities and Exchange Commission has asked for reams
of bond quotations from operators of retail-oriented electronic bond-trading
platforms, in some cases asking for pricing data from August to November of
last year to be delivered by the third week of January. The Financial Industry
Regulatory Authority, Wall Street’s self-regulatory agency, also plans to
gather price quotes from bond platforms for monitoring purposes. The agency
will send a notice to industry participants this month about the proposal and
will seek advice about whether to publicly disseminate the data it collects.
SEC Chairman Mary Jo White last June suggested
requiring the public dissemination of buy and sell orders from bond platforms
as part of the agency’s broad transparency push at a time of increased
volatility and electronic trading in fixed-income markets. The focus on
gathering quotations follows a November proposal Finra issued jointly with the
Municipal Securities Rulemaking Board that would force brokers to disclose what
prices they pay for bonds they flip within the same trading day to clients.
That joint proposal stops short of requiring brokers to
identify their markups in the percentage terms that industry participants
typically use to judge a fee’s fairness; Finra uses a 5% threshold when
measuring markups and determining when to examine firms more closely. But the
proposal would force brokers to disclose to clients what they and those clients
have paid for the same securities, plus the differential in dollar terms.
The joint proposal applies to orders of $100,000 or less,
and is available for public comment through Jan. 20. The SEC would have to
approve any rules before they take effect, which could take several months.
Representatives at the Securities Industry and Financial
Markets Association and the Bond Dealers of America, which represent securities
dealers, said the new disclosures might be misleading, as they could be too
technical for unsophisticated investors to understand, and may not take into
account how different transaction costs may relate to the movement in prices
throughout the trading day.
Currently, most investors only see prices after trades are
complete, either through Finra’s Trade Reporting and Compliance Engine known as
“Trace” for corporate debt or the MSRB’s Electronic Municipal Market Access
websitecalled “Emma” for municipal bonds.
Bonds typically trade infrequently, unlike the stock market,
in which exchanges continuously publish prices, and many bond investors
complain they don’t know what constitutes a fair price at the time of trading.
Retail investors often say they don’t use or understand the price-comparison
tools in the market. Studies suggest they are at the most risk of excessive
Fees have been dropping, yet remain above those charged in
other, more transparent markets, according to S&P Dow Jones Indices LLC,
part of McGraw Hill Financial. Individual investors buying highly rated
municipal bonds now pay on average 1.31% in fees per transaction, down from
about 2% in 2011, the data company found.
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