SEC Trying to Even the Field for Bond Markets

July 9, 2014 by Thomas F. Burke, P.C.

The Wall Street Journal reported that the Securities Exchange Commission ("SEC") wants to even the field in the bond market between small investors and Wall Street's biggest banks. The SEC unveiled plans to make real time pricing information for the corporate and municipal bond markets less difficult for investors to obtain. This proposal would require public dissemination of the best buy and sell orders generated on private electronic networks for bonds that are currently accessed primarily by market insiders. Average investors typically see prices only after a trade is executed.

The SEC's effort to broaden access to pricing information comes amid a broader push to erode some of the trading advantages used by computer driven trading. Bond trading is dominated by, and highly profitable for big Wall Street banks, while regular investors have been shut out of the inner workings of the bond markets.

Unlike the stock market, where exchanges publish buy and sell orders in real time, there is little way for investors to check demand for bonds. Customers thus can't tell if they are being overcharged on bonds until after the trade is completed. The SEC's proposal resembles the changes the SEC made in the late 1990s which made trading information about stocks far more widely available to individual investors.

The biggest beneficiaries of bond market pricing information might be fund managers because they would have a better idea about how much supply and demand existed in the bond markets. Bank industry representatives played down the significance of disclosure information in the bond markets since the markets for municipal bonds are so thinly traded due to weak demand.

The Financial Industry Regulatory Authority ("FINRA"), which oversees the industry, has been probing trading of banks and other middlemen in certain bond transactions, looking for unusually large profits.

The SEC is planning to work with FINRA and the Municipal Securities Rulemaking Board to implement rules outlining best execution standards for municipal bonds and to develop new rules regarding the disclosure of markups, the added charges that brokers tack onto certain municipal and corporate bond trades.