Chapter 44. Bond Market Transparency

DANIEL E. GALLEGOS

Principal, Barclays Global Investors

CHRIS BARR, CFA

Principal, Barclays Global Investors

Abstract: Unlike equities, most U.S. fixed income securities are traded over the counter, not on formal exchanges like the New York Stock Exchange. This convention, combined with the large number of debt issues outstanding, is largely responsible for the lack of price transparency that exists in the fixed income markets. Poor transparency contributes to investor differences in bond valuations as well as other inefficiencies that may lead to economic losses for market participants and ultimately inhibit business development. To address the inefficient nature of fixed income pricing, the bond market has evolved, aided by advances in technology, innovations in pricing methodologies, and modification of regulatory requirements.

Keywords: price transparency, bid/offer, price indications, multidealer-to-client electronic platforms, Trade Reporting and Compliance Engine (TRACE), Municipal Securities Rulemaking Board (MSRB), Real-time Transaction Reporting System (RTRS), matrix pricing, best execution, fiduciary, option-adjusted spread (OAS)

In this chapter, we discuss the benefits of price transparency for investors, the causes and effects of poor price transparency in the major fixed income sectors, arguments that support and oppose further transparency, and a few key elements of these markets that continue to undergo significant changes.

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