The National Association of Securities Dealers is hammering firms for even the smallest of violations to the Trade Reporting and Compliance Engine (TRACE), handing out more and more fines of $15,000 or more for late reporting as it pushes for more openness in the bond market, compliance officers and lawyers said. Late reporting problems can arise in instances where a new bond issuance has to be reported with a temporary, generic bond identifier. Bond trades must be reported with a Committee on Uniform Securities Identification Procedures (CUSIP) identifier, but one is not always immediately available. Therefore, the bond transaction must be reported with a "dummy" identifier until the CUSIP is published, a counsel at a Connecticut-based B/D said.
Firms believe such violations are sometimes beyond their control. Enforcement actions involving TRACE have been steadily increasing, but have, until recently, involved more egregious violations such as supervision failures, which combined with other violations have yielded fines of up to $225,000. Now, firms that plug in CUSIP numbers after 15 minutes are being fined. An NASD spokeswoman was not prepared to comment about these violations by press time.
These actions come as NASD is proposing to release historical TRACE data that had not previously been made public. In response, the Bond Market Association sent a letter to the organization calling for restrictions, asking that certain historical data not be made available until 18 months after the calendar quarter in which that trade occurred. This is to ensure the information can no longer be used to determine trading strategies of market participants. It believes certain information from TRACE would be helpful, even on a delayed basis, in determining whether bid-ask spreads have compressed or widened, and whether trade volumes have decreased or increased.
But the association has spoken out against NASD's proposal to provide access to information on the trading of 144A securities, which has previously not been publicly disseminated on TRACE. It also opposes proposals to reveal the identity of parties to a trade, arguing that this would harm liquidity and stop firms from obtaining the best prices for their clients.
Players on both the buyside and the sellside, especially regional brokers, say they are feeling the negative effects of TRACE. One head of sales and trading at a regional broker has seen his revenues fall because of TRACE and believes NASD's proposal to disseminate more information on trades will squeeze regional brokers further.
"A lot of liquidity in names is drying up. It is very difficult to take positions in bonds that are reported on TRACE. It is hard to make money because everyone knows what your cost is. Bottom line, our revenues are less and we have had to cut costs," he said. One buysider complained TRACE has made it harder to conceal his trading strategy. He explained that if he buys a bond, especially an illiquid one, the market knows right away about the trade. "It is right out there, what I am doing. People see that big trade and supply dries up," he said.
Regional brokers feel the effects of TRACE more than larger dealers, primarily because they rely on secondary trading; larger dealers can make up lost revenue by doing more primary business. "It will put more and more people out of business. People don't care about the regional brokers. Big dealers are not as badly affected because they have the ability to go after new-issue business," he said.
A NASD spokeswoman said it is reviewing comments on its proposals and was not able to comment further on its next course of action. In response to complaints from regional brokers that TRACE has harmed liquidity she said, "NASD believes TRACE transparency provides investors with extremely valuable information and there is no evidence that it has materially affected liquidity."
