Price Transparency in the U.S. Corporate Bond Markets

Abstract

Three prominent academic studies, all recently published, found that corporate bond investors have benefited from the post-trade transparency that has resulted from the reporting requirements mandated by the U.S. Securities and Exchange Commission's (SEC) Trade Reporting and Compliance Engine, or TRACE. The author argues that all three studies suffer from similar methodological shortcomings, such as confusing dealer mark-ups with commissions in measuring transactions costs and overlooking the far more relevant trading opportunity costs. And although TRACE may have facilitated price discovery, the author asserts that it is at the expense of quantity discovery and, thus, has incrementally decreased market liquidity. The SEC's implementation of TRACE was undoubtedly well intentioned, but it appears more harm than good was done to the investors it was meant to benefit.