quest to introduce the corporate bond market to the concept of price transparency moved forward today with the
National Association of Securities Dealers'
filing of a plan to build a system that would gather and disseminate corporate bond transaction data.
chairman wants the bond market to work more like the stock market -- where investors can make buy and sell decisions based in part on the price at which the most recent trade took place. Except in the Treasury market, the most liquid of the bond markets, last-trade information is difficult (if not impossible) to come by. As a result, unsophisticated investors can fall prey to dealers who would sell bonds for more than they are worth.
In a September 1998
speech, Levitt called upon the
"to develop systems to receive and redistribute
corporate bond transaction prices on an immediate basis."
"I simply refuse to accept that this market cannot be as transparent as other markets," he said. That attitude is extremely irritating to corporate bond dealers.
They argue that because bonds trade relatively infrequently, last-trade data for a specific security is often meaningless. In the corporate bond market, which is dominated by institutional investors, price transparency is achieved by investors' checking prices with multiple dealers, they add. (Most individuals wealthy enough to buy individual bonds, which trade in blocks of at least $5,000 face value, rather than bond fund shares, want the tax advantage afforded by municipal bonds.) And trade reporting has the potential to rob corporate bond investors of the secrecy they require to protect the value of their holdings in an illiquid market, dealers say. (In April, Levitt
took the dealers to task for foot-dragging on the issue.)
Today's development fulfills Levitt's command by dropping a plan on the SEC's desk. According to the plan, the NASD would begin collecting corporate bond transaction data from its members in April. For the first six months, firms will have an hour after execution to report a trade. Thereafter, the reporting time will be compressed to 15 minutes, and the NASD will start combing through the data.
The data will be disseminated via market data vendors, just as
stock prices are, a NASD spokesman said. So the ability of an investor to view the data would be contingent upon vendors agreeing to purchase it, just as it is with Nasdaq stock prices.
Still, in that regard this proposal differs from a competing initiative unveiled jointly by the
Bond Market Association
over the summer.
Also responding to Levitt's call for increased transparency, the association and GovPX unveiled
Corporate Trades I
, a price reporting system that makes corporate bond trade data available on the Internet for free. However Corporate Trades I makes available only data from the previous day. It closely resembles the municipal bond next-day trade reporting system the association introduced a year ago. Both systems are housed on the association's
The association, which represents bond dealers and has approached transparency with caution, issued a cryptic statement on the NASD proposal. "The Association believes the plan would have far-reaching consequences," association president Heather Ruth said.
Bond Market Association spokesman Michael Dorfsman said the group, which had a representative in the NASD process that produced today's plan, had to review the plan before it could specify what kind of consequences it would have. "The questions are, will it affect liquidity and will it affect market efficiency?" he said.