The main U.S. securities regulator is ramping up calls to democratize a $40 trillion bond market, proposing that smaller investors receive more price information to avoid getting fleeced when buying less-traded debt.
The Securities and Exchange Commission wants retail investors to have the same access to privately negotiated bond prices as big institutions, allowing them to make better decisions about how much to pay for the securities, Chair Mary Jo White said yesterday. Releasing such information on corporate and municipal transactions would promote competition and better execution, she said.
The SEC is “very focused” on making changes in market structure in the “next year or two,” White said. “This potentially transformative change would broaden access to pricing information that today is available only to select parties.”
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.
Disseminating more information will have a cost associated with it, especially for the biggest banks that derive a significant portion of their income from bond trading and sales. 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.
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.
Brian Marchiony, a spokesman for JPMorgan, declined to comment on White’s remarks.
“Initially, the impact to dealers would probably be negative,” said Anthony Perrotta, head of fixed-income research at Tabb Group LLC. Over time, “it will ultimately allow the markets to grow and become more fluid.”
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 markets, she said.
White said she’s 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,” rather than smaller buyers.
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, attracting record cash from the growing population of retirees.
Finra is expanding its bond-price reporting into the $1.5 trillion market for private company debt, which is only sold to institutional buyers.
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.
“It is still common for investors to place corporate- and municipal-bond trades by calling their broker for a quote,” SEC Commissioner Daniel M. Gallagher said in a May speech. They often transact “without much insight as to whether they are receiving best execution and a fair price.”
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