PrefBlog

SEC Commissioner Caroline A. Crenshaw gave a speech titled Fixed Income and Options: The Other Market Structures:

The corporate bond and municipal securities markets are relied upon by both retail and institutional investors, including Americans who are approaching retirement or are already there. In the corporate bond market, trades under $100,000 account for between 60% and 70% of reported customer transactions.[17] In the municipal securities market, transactions of less than $25,000 account for more than half of the trades, and those less than $100,000 account for 87% of trades, reflecting that individual investors hold the majority of outstanding municipal bonds.[18]

Investors in these markets are incurring trading costs that far outstrip the costs of transacting in the equity markets. While estimates of trading costs can be a challenge in part due to the relative lack of transparency, academics have estimated corporate bond trading costs at around 84 basis points[19] and municipal bond trading costs as high as 90 basis points for retail-size trades.[20] Surprisingly, smaller bond transactions, which are more likely to originate from retail investors, are more expensive to complete than larger transactions – the opposite of the pattern typically observed in equity markets.[21]

One way to reduce transaction costs and improve investor outcomes would be to improve price transparency. Post-trade price transparency, via TRACE and EMMA, has been a feature of the U.S. fixed income markets, to varying degrees, since the 1990s, and there have been significant improvements over the last several years. However, fixed income markets still largely lack the pre-trade price transparency that has been a feature of the equity markets for decades. While there are some quotation data available from dealers and electronic venues, smaller dealers are less likely to have access to these data or the ability to consolidate them effectively, and they are generally not visible to the retail customer and therefore cannot be used to help the customer negotiate a better price with its dealer.[22] And post-trade information for infrequently traded bonds can be stale or even unavailable.[23] Consistent with this, research on municipal bond markets from the SEC’s Division of Economic and Risk Analysis showed that the majority of customer trades execute at worse prices than best available dealer quotes.[24]

This entry was posted on Thursday, March 30th, 2023 at 5:54 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.