Analysis of TRACE Data Also Finds Potentially Significant Changes in Market Structure
WASHINGTON — The Financial Industry Regulatory Authority (FINRA) today issued new research that provides a deep and focused look at the state of liquidity in the U.S. corporate-bond market. Analyzing all TRACE transactions from 2003 to September 2015, the research found:
- Most measures indicate a healthy market. New bond issuance is at a record level, transaction volumes have continued to grow, and the number of trades is rising. The cost of trading corporate bonds has been decreasing, as indicated by narrower bid-ask spreads and falling price impact to block trades.
- However, several measures offer evidence of potentially significant changes in how the market is working, including smaller average trade size and a declining proportion of bonds traded in blocks of $5 million or more. These trends are consistent with a market that has a larger number of issues, more electronic trading and a growing network of counterparties.
"Given the range of public discussion about bond-market liquidity, our research provides additional, empirical evidence on the subject," said Jonathan Sokobin, Chief Economist at FINRA. "While the data indicate a robust market, they also highlight several areas of potential emerging risk that merit more attention and further study." According to the research note, these issues include increased electronic trading in corporate bonds, the volatility of bond ETFs and sector-specific problems in high yield originating in the energy sector.
TRACE, the Trade Reporting and Compliance Engine, is the FINRA-developed system that facilitates the mandatory reporting of over-the-counter transactions in eligible fixed income securities. All broker/dealers who are FINRA member firms have an obligation to report transactions in eligible securities to TRACE under an SEC-approved set of rules.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firm, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.