NEW YORK (TheStreet) -- Increased transparency in corporate and municipal bond markets could revolutionize online trading platforms and allow smaller traders to participate in an asset that has largely been dominated by institutions.
Securities and Exchange Commission Chair Mary Jo White recently called for wide-scale reforms of the multitrillion-dollar bond market.
In a speech Friday at the Economic Club of New York, White acknowledged that fixed-income regulation has taken a backseat to equity markets in recent years as regulators have been more focused on high-speed trading in U.S. stock markets.
Her most notable suggestion for reform was the SEC's initiative to start requiring electronic dealer networks to publicly disseminate their best prices for corporate and municipal bonds.The move would focus on providing pretrade pricing data to all participants in the market, especially to smaller retail investors. "This potentially transformative change would broaden access to pricing information that today is available only to select parties," White said in prepared remarks. The new regulation reminds many of how live stock market quotes made available to investors in the 1990s led to exponential growth in liquidity. A 2014 study by Rong Ding from Middlesex University and Wenxuan Hou at Durham University found that the more news about an asset that is available to investors, the more liquidity that asset is likely to have. The paper suggests that when investors have more information available to them, they are likely to familiarize themselves more with the asset, something called "investor recognition." "In markets with incomplete information, information asymmetry becomes more severe for stocks with lower investor recognition," the paper explains. "When individual investors pay more attention to a stock by actively searching it on the internet, they acquire relevant information mitigating information asymmetry." The benefit of this information is that investors then become more confident that they know all of the facts, and are thus more likely to then invest in the asset. "As a result, stock liquidity increases with the active attention of retail investors," the paper concludes. The move by Mary Jo White and the SEC may open the doors of the fixed-income world to investors of all levels.
At the time of publication, the author had no position in any of the funds mentioned. Follow @macroinsights This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff. Flying Between the U.S. and China Is Booming; Too Bad It's Not Profitable Why Barnes & Noble Stock Is Surging This Morning