Some high-yield investors have been left scratching their heads over a recent comment letter from The Bond Market Association in which the trade group called on the Securities and Exchange Commission to back pedal on plans for greater disclosure regarding illiquid trades. The letter urges the National Association of Securities Dealers to amend its proposal for increased rapid dissemination of data concerning illiquid, low-rated trades. The BMA says more disclosure will drive firms out of the market and thus lead to less liquidity.
"More information is better for the investor. Anyone who says otherwise is either an idiot or a liar," said Tom LaPointe, portfolio manager at Columbia Management Group in Boston. He added that only underwriters, and perhaps a few hedge funds, benefit from less information being disseminated. "Brokers are concerned about it because they don't want to reveal how much money they're taking out of a trade--they won't be able to take three points out anymore," said another investor. Others agreed that increased disclosure would, obviously, be better for investors and detrimental to dealers, which is why the BMA opposes it.
The BMA's objections to greater price dissemination come as the NASD last week reached settlements with Goldman Sachs, Citigroup, Deutsche Bank and Miller Tabak Roberts Securities over the firms' activities in high-yield trading. Specifically, the NASD said the firms overcharged investors who bought illiquid corporate bonds and underpaid investors who sold these securities. BMA officials would not comment on these settlements.
Michele David, v.p. and assistant general counsel at the BMA in New York, pointed out dealers are able to do business in low-rated securities because they are able to make a profit trading them. "Dealers provide a lot of liquidity and immediate price dissemination would take away the incentive for the dealer to hold the risk associated with low-rated credits," she said. "If they buy a large block and the entire market sees the price, that will take away the opportunity for the dealer to stay in business."
In fact, David argued that investors would ultimately be harmed by greater price dissemination. "If you take away the incentive for the dealer community, the liquidity providers, investors will be stuck holding illiquid issues for which there is no market," she stated. Also, if an investor wants to sell a huge block and the market can see where it's priced and places its bids accordingly, the investor will wind up with less of a profit, too, she noted.
