The Bond Market Association is blasting a new proposal by the National Association of Securities Dealers that would require NASD members to reveal additional information about the counterparties to a trade on the Trade Reporting and Compliance Engine (TRACE). The BMA, along with its asset managers division, has sent a letter to NASD arguing that the proposal could harm liquidity. It is the second time the BMA has charged that TRACE reporting practices hurt liquidity. Last November, it sent a letter to the Securities and Exchange Commission speaking out against NASD's proposal to provide immediate price data for high-yield bonds.
The new proposal is requesting that NASD members disclose whether a counterparty to a trade is a dealer or a customer and whether the trade is buy or sell. In the letter the BMA sent to NASD, it commends the NASD for its desire to increase price transparency and disseminate price data in the debt securities market, but also argues it can harm liquidity. "We believe the proposal will result in increased trade transparency, rather than facilitate price transparency, and that the effect of such trade transparency will be harmful to investors," said Mary Kuan, assistant general counsel at the BMA in an email. An NASD spokesman did not return calls seeking comment.
Kuan explained that if market participants can determine whether an investor wishes to buy or sell bonds, other market participants could buy and sell securities in advance of the investor, artificially racheting up or driving down prices. "The ability of investors to execute trades without signaling their activities to the market is essential to induce dealers to commit capital to facilitate trades and is integral in enabling customers to obtain optimal prices," said the letter.
Martin Fridson, ceo of FridsonVision, an independent investment research firm, pointed out that institutional investors are not keen for increased trade transparency. "There are some institutional investors that don't necessarily embrace the idea of greater transparency. If an institution is trying to buy or sell a position, the last thing they want is to disclose that position."
Fridson said institutional investors are worried that increased trade transparency as a result of TRACE is harming liquidity. "Institutional investors are nervous that over the last several years dealers have [stopped] taking positions, which has made trading harder." He added the regulators are not geared to the interests of large institutional investors. "The regulation of the securities market is stuck in 1934. They are more geared for the benefit of the small investor."
The BMA is asking that the proposal either not be adopted or that it, at the minimum, not be submitted to the Securities and Exchange Commission until more undisseminated TRACE data has been released and analyzed and market participants have had the opportunity to address its concerns with the NASD.
