The $38 trillion U.S. bond market needs to be improved to allow better access for all investors, said Securities and Exchange Commission member Elisse Walter.
"The more I look at it the more concerns about fairness I have," she said today at a series of roundtable discussions the agency is holding in Washington on fixed-income markets.
Walter sought to assure participants that the agency isn't trying to impose an equity-market structure on bonds with exchange trading and pre-trade price transparency. The challenge, she said, is for regulators to understand the complexity of how debt trades to discover what must be changed. "In this arena, I keep having to reassure people that we get it," she said.
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Dealers have scaled back principal trading in the market amid pressure to increase capital to meet international standards and as they face lower profits from more transparency created by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, according to a report today by consulting firm Tabb Group LLC.
Dealer corporate bond inventory has dropped to $56 billion, below the average of $69.3 billion since the end of 2009 and down from a peak of $235 billion in October 2007.
"Dealers cannot quote in size and wide enough spread to justify the capital deployment" to hold an inventory of bonds, Will Rhode and Henry Chien wrote in the Tabb report. A system for creating instantaneous quotes needs to be developed, they said. "The challenge is simple: how do you price a bond trade in real time?"
One concern for investors is showing large trades to the entire market on bond trading systems, said Robert Auwaerter, head of the fixed-income group at the Vanguard Group Inc.
"You leave a footprint in the market that disadvantages you," Auwaerter, a panelist on the first roundtable, said. "It's better to try to go around quietly to dealers" because "if you advertise it to the world you destroy your bid-price execution," he said.
Bloomberg News
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