When it comes to trading bonds for big dealers, too much information can be a bad thing.
So on Monday, when regulators start disseminating additional information about each corporate-bond trade, it will probably further eat into the traditional business of human traders who match buyers and sellers. And it'll probably benefit the managers of electronic-trading systems such as MarketAxess.
And on some level, that's the goal. Regulators would like to see a greater proportion of company-debt transactions executed on electronic marketplaces, which are easier to monitor and typically offer more transparency than people negotiating by phone, email and text. Also, computers don't negotiate salaries and bonuses; theoretically, the more they're used to match buyers and sellers, the cheaper it'll be to maneuver in the $8.4 trillion U.S. corporate-bond market.
Starting Monday, the Financial Industry Regulatory Authority will include more information in its Trace bond-price reporting system to give a clearer sense of how much investors are paying traders in commissions for each transaction and the proportion of trades executed on electronic systems.
The added information will have several immediate effects. It will delight analysts who are trying to better understand the structure of U.S. credit markets. They've been speculating that Wall Street traders mostly just match buyers and sellers, without incurring much risk on their own, but now it will be easier to determine whether that's the case.
The information will also provide a real-time sense of activity on computerized marketplaces. This will give electronic platforms a chance to show how much traction they're gaining.
Lastly, it will protect less-experienced investors who are trading small amounts and have fewer or no Wall Street relationships while possibly further crimping compensation for brokers. Right now, this doesn't seem like such a big deal because it's hard to gouge a bond buyer who's receiving so little yield to begin with. But if yields ever rise, this new data may prove invaluable, particularly to smaller investors.
Finra's Trace system was controversial when it was introduced in 2002 and remains so. It was intended to create a more level playing field for all investors by publishing real-time prices so it would be harder for brokers to take advantage of customers. It has certainly improved market efficiency, but it has also spurred endless soul-searching about what the market for corporate debt will and should look like.
These new disclosures give another hint about where things are headed.
The role of big Wall Street banks, which has already been evolving, will have to change even more rapidly. There is still very much a place for human traders, but they will have to be in the business of brokering ideas as much as actual bonds, and they'll need to understand how to navigate a computerized marketplace.
Some bond-trading firms are already doing this; others aren't. Human bond traders aren't going away, but they need to adapt to an increasingly transparent world. Those that don't won't survive.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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Lisa Abramowicz in New York at firstname.lastname@example.org
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