Clarity in Bond Market Is Sought

Investors in corporate bonds would save at least $1 billion a year if more trading prices were reported publicly, the Securities and Exchange Commission said in a new study.

The report argues for greater transparency in the debt market and concludes that corporate bond markups by dealers drop dramatically when trading prices are disseminated to the public. The SEC staff tracked $9.4 trillion worth of bond trades reported to the NASD’s Trade Reporting and Compliance Engine system, or Trace, in 2003.

Price quotes are published for only about 1 in 4 corporate bonds, according to the SEC, which said it studied trading in 17,000 bonds last year. With most trades, the lack of a publicly available quote and the need for a buyer and seller to find each other directly and negotiate a price increases the transaction costs, the SEC said.

“Ask the public whether they could negotiate better prices when buying a car if they knew the prices everyone else had paid,” said Larry Harris, a USC professor of finance and former SEC economist who worked on the study. The aggregate benefit might exceed $1 billion, he said.

The SEC has encouraged the NASD to release more information on bond trades to improve the transparency of the markets. The NASD, formerly known as the National Assn. of Securities Dealers, has been reporting prices for some bonds since 2002.

The push to require the release of more price data has riled some securities executives, who say that big investors need anonymity to trade effectively, and that any pullback by them would diminish bond market liquidity.