SEC Reforms Shift to Bond Markets

Securities and Exchange Commission Chair Mary Jo White on Friday widened her focus on market reforms aimed at leveling playing fields for all participants, this time targeting bond markets.

In a speech at the Economic Club in New York, White introduced proposals designed to increase transparency and improve trading efficiencies in fixed-income markets. The reforms, she said, would benefit retail investors and remove advantages now exploited by so-called market “intermediaries,” or professional Wall Street brokers.

White said widening the scope of the SEC’s reforms to bond markets is part of an ongoing effort “to continue and broaden the discussion about these fundamental issues.”

Earlier this month, White said the SEC wants to achieve more oversight of high-frequency trading, the controversial practice that now accounts for more than half of all equity trading. High-frequency traders use sophisticated computer programs to rapidly trade large amounts of stock.

Critics argue the new technologies help professional high-frequency traders gain an edge over retail investors.

The proposals White outlined two weeks ago will also seek more transparency from traders who use so-called dark pools, or unregistered exchanges that don’t require the same level of disclosure as SEC-sanctioned exchanges.

Now White has shifted the regulatory agency’s gaze toward fixed-income markets. Specifically, to the bond market and in particular the municipal bond market.

White said she’s “concerned that, in the fixed income markets, technology is being leveraged simply to make the old, decentralized method of trading more efficient for market intermediaries, and its potential to achieve more widespread benefits for investors, including the broad availability of pre-trade pricing information, lower search costs and greater price competition, especially for retail investors, is not being realized.”

In other words, the rapid advance in technology is working to the benefit of professional market speculators – “intermediaries” – rather than the mostly mom and pop investors who buy municipal bonds because they are relatively risk free and provide steady returns.

White said the SEC will be working closely with securities and bond market regulators to ensure that retail investors are provided the same access to pricing information and efficient execution of trades as professional bond speculators.

“The development of a workable best execution rule for both the corporate and municipal bond markets is vital for the protection of investors and enhancing price competition,” she said.

The SEC will also work with regulators to ensure that retail bond market investors aren’t being overcharged by their brokers.

“This information should help customers assess the reasonableness of their dealer’s compensation and should deter overcharging,” White said.