FINRA Pilot Test Obscures Bond Price Transparency
FINRA regulators are contemplating extending the posting of large corporate block bond trades for two days. FINRA defines the caps initiating this rule change as $10 million for investment grade and $5 million for non-investment grade bonds. This change essentially obscures such large trades from the market. As I understand it, there would be no posting of the trades, no time and sales of the trades, no dealer BUY or SELL attribution for two full days. To me this obscures bond prices. It turns back the clock on fairness and transparency. Such a major change could compromise most money manager’s ability to execute our fiduciary responsibilities.
Who can possibly think nondisclosure of corporate bond trades for two business days is fair or that it’s a good idea? If the regulators insist on a pilot study to test this hair-brained idea, who exactly are the beneficiaries? I’ll tell you who—the big players; the brokerage firms, banks, hedge funds and to a lesser degree mutual funds. Clearly the biggest and most profitable players that go from the present reporting trades within 15 minutes to two days will be happy…cha-ching.
For those of us who manage bonds but don’t trade in gigantic size, hiding large block trades leaves us with no market “context.” Oh, sure we’ll see the 10’s, 20’s, and sub-500 retail trades. But the large blocks are often the GPS system that enables us to compare and contrast pricing to ensure we’re getting the best execution for our clients. That’s our fiduciary responsibility. Plus, the Securities and Exchange Commission requires money managers to prove—with a documented audit trail—that we fiduciaries got the best prices for our clients. Trading $1 million bonds today may look like incompetence in two days when the $10 million block trades post.
This is a bad idea at every turn. So, the most profitable and largest dealers and bond managers that already make the most money may be able to increase their revenues even more. We might as well turn back the clock 60 years to a time when they posted trades on a blackboard using chalk. The wiggle room for dishonesty and “painting the tape” could be massive under this scheme. Isn’t that exactly why Main Street loathes Wall Street?
If this pilot program is initiated and becomes protocol, then FINRA needs to delete the word, transparency, appearing numerous times on its website when referring to bond prices and trading.