In a speech last week at the Economic Club of New York, SEC Chairman Mary Jo White set out three new initiatives that will reorder the way fixed income markets serve retail investors.
Congress gave the SEC the authority to regulate fixed income markets in 1975. The initiatives that White announced make up the first broad extension of the SEC’s authority over the murky, cost ridden, over-the-counter bond market. The combined firepower of the SEC, FINRA and the MSRB will likely topple any resistance that dealers will use to protect one of the last remaining profit centers.
In her speech, White pointed out that securities markets operate within a “structure” of regulator rules, technology and market practices. Bond trading information for retail-size trades is often locked in trading venues and available only to select market participants. Transparency for investors is mostly an illusion. White said:
It is striking that the dramatic technological advances that have transformed the equity markets over the past decade have had only a modest impact on the trading of fixed income securities. While today there are a number of electronic systems that facilitate trading in fixed income securities, they tend to be ‘inventory-based,’ providing information primarily on the bonds their participating dealers would like to sell.
The vast majority of small trades are executed through alternative trading systems (ATS) like Bonddesk and The MuniCenter.