PrefBlog

Jayson Horner, chief executive officer, president, and co-founder of CanDeal, writes a piece in the Globe on electronic bond trading:

As regulators seek to enact change, they must balance their transparency objectives with the needs of market participants, respecting the unique properties and characteristics of each market and its participants.

An optimally transparent solution will facilitate price discovery, but should not compromise an investor’s ability to successfully execute a trade strategy, or obstruct liquidity providers looking to prudently manage their risk. Interestingly, the knock-on effect of excessive transparency can ultimately also harm the retail investor to the extent that institutional investors act as fiduciaries for their benefit – through for example third-party asset management, pension plans and insurance.

That’s certainly the right idea, but harm to retail investors doesn’t stop there. Harm is also caused when dealers can’t make money out of corporate debt in the public markets, so they become reluctant to finance inventory, which in turn encourages issuers to go the private placement route. This is happening in the States; I have often railed in this blog about the harm that TRACE is doing to all participants in the US corporate bond market.

As I have also said before, regulators must ask themselves: what is the market for? Specifically, what is this market for? Is it something that, ideally, will allow grandma to invest her $5,000 at a so-called fair price? Or is it something that, ideally, will allow Very Big Manufacturing, Inc., to issue $500-million in debt with entirely reasonable prospects of rolling it on maturity?

Grandma’s got the alternative of mutual funds and ETFs which, for most people, make more sense than individual bond purchases anyway. Very Big Manufacturing, Inc.’s alternatives are to look for money abroad (at much higher risk and expense), or issue as a private placement (reducing investor choice), or simply not to expand due to financing difficulties.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets down 20bp and DeemedRetractibles losing 23bp. The Performance Highlights table is surprisingly lengthy and comprised almost entirely of losers. Volume was extremely high.

This entry was posted on Tuesday, September 10th, 2013 at 8:46 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.