TRACE at 20: Reflecting on Advances in Transparency in Fixed Income
By Stephanie Dumont and Ola Persson, FINRA
This Friday – July 1, 2022 – will mark the 20th anniversary of FINRA’s Trade Reporting and Compliance Engine, known as TRACE to everyone in the fixed income industry and regulatory community. TRACE is FINRA’s real-time, over-the-counter price dissemination service for the fixed-income market, bringing transparency to the debt markets, including corporate and agency debt as well as asset- and mortgage-backed securities. This milestone provides occasion to reflect on the history, impact and future of this pioneering platform – in fact, there is much on which to reflect:
TRACE today is widely viewed as an essential part of the fixed-income market infrastructure, but prior to its introduction in 2002, there was no centralized, public-facing platform to disseminate bond transaction data.
In a 2002 news release announcing the launch of TRACE, Douglas H. Shulman, then-President of Regulatory Services and Operations at the National Association of Securities Dealers (FINRA’s predecessor), said, “In today’s business climate, it is more important than ever for regulators and investors to have access to more information. In developing this system, NASD has worked closely with the SEC, Bond Market Association, and the dealer community to ensure that the TRACE maximizes transparency, while optimizing liquidity.”
That has been a touchstone for FINRA and TRACE ever since: pursuing a balance between enhancing transparency and not negatively impacting liquidity. TRACE has helped level the playing field for all market participants by providing accurate, comprehensive, real-time bond price information to retail and institutional investors alike, as well as market professionals. That data has helped investors gauge the quality of the order execution they are receiving from their broker-dealers. From a regulatory standpoint, it has better enabled regulators to monitor the market, pricing and execution quality.
It all started gradually and deliberately.
FINRA launched TRACE with new rules requiring the reporting of virtually all transaction information in TRACE-eligible securities. Public dissemination of transaction information was implemented in three phases through 2005, starting with large, investment-grade bonds and later expanding to smaller, less active issues. This allowed FINRA to study the impact of transparency on liquidity.
In a parallel effort, the time in which to report a transaction was reduced gradually from 75 minutes at the launch to 15 minutes on July 1, 2005, to allow for more timely data to be disseminated to the public with minimal impact to reporting firms. Since Jan. 9, 2006, all transactions in public TRACE-eligible securities have been disseminated immediately upon receipt.
On March 1, 2010, TRACE began requiring the reporting of transactions in U.S. agency debentures, as well as primary market transactions in TRACE-eligible securities. Primary market transactions are subject to dissemination, with the exception of list or fixed offering price and takedown transactions.
Effective May 16, 2011, TRACE began requiring the reporting of transactions in asset-backed and mortgage-backed securities. Since November 2012, TBA (“To Be Announced”) transactions are disseminated to the public, and since July 22, 2013, mortgage-backed securities (MBS) transactions also became subject to dissemination. Effective June 30, 2014, TRACE began disseminating transactions executed pursuant to SEC Rule 144A. On June 1, 2015, asset-backed securities, as defined in FINRA Rule 6710, became eligible for dissemination.
Since July 10, 2017, TRACE began requiring the reporting of transactions in U.S. Treasury securities – more on that below.
Today, TRACE data are widely available. All major market-data vendors carry real-time TRACE data through data feeds and desktop display applications. Retail investors can see the data free of charge on FINRA’s Market Data Center. FINRA also has created a data set specifically for academic research.
In addition, FINRA publishes daily weekly and monthly aggregate data on market activity in corporate bonds, structured products and Treasury securities. The TRACE Fact Book is updated quarterly and annually with scores of data sets about fixed-income trading activity, issues and market participants, as well as TRACE’s history, a glossary and other information.
The market for U.S. Treasury securities is the largest and most liquid in the world. Five years ago, responding to unexplained volatility in the Treasuries market (commonly referred to as the Treasury “flash crash”), FINRA worked quickly with the Interagency Working Group, including the SEC, Federal Reserve and Department of Treasury, to bring Treasuries transaction reporting to TRACE.
This provided regulators with a new source of trusted, reliable data to expand their visibility into this critical trading activity. For example, FINRA used TRACE data in bringing a 2021 disciplinary actionagainst a trader for “spoofing” the market for Treasury securities; that is, placing large, non-bona fide proprietary orders to purchase or sell Treasury securities while simultaneously entering smaller, bona fide proprietary orders on the opposite side of the market. This created a false appearance of market depth and activity so his bona fide proprietary orders would receive a favorable order execution.
At an April 26, 2022 speech at London’s City Week, SEC Chair Gary Gensler called for expanding transparency in the fixed-income market, including Treasuries:
“Five years ago, TRACE was expanded to require broker-dealers to report Treasury transactions, but there isn’t yet any public dissemination. Last fall, the Federal Reserve finalized a rule to use TRACE to require certain banks to report transactions in Treasuries, agency debt, and agency mortgage-backed securities to TRACE. Once more major firms have reporting requirements — the banks and potentially principal trading firms in the future — I think it could make sense to disseminate this information to the public.”
He added, “Public dissemination of Treasury trade data could help enhance counterparty risk management and the evaluation of trade execution quality. It also could expand the provision of liquidity.”
FINRA supports the SEC’s agenda for increasing transparency, and also continues to work with the Treasury, as noted recently by Treasury Under Secretary Nellie Liang. In addition, Under Secretary Liang earlier this month announced a request for public feedback on additional post-trade data transparency in the Treasuries market. And recently, the Federal Reserve Board adopted a rulerequiring banks to report transactions in Treasuries to TRACE.
TRACE has long been a critical resource in the regulation of trading in corporate and other fixed income securities. Examples include:
A number of independent academic studies have explored the effects of TRACE on the market and found that TRACE has:
All of this research is posted on FINRA’s website.
Looking ahead, in addition to the prospective development in Treasuries market transparency referenced above, as of this writing there are other pending initiatives to enhance the transparency provided by TRACE and ensure that TRACE information reflects evolving market practices. Two are noted below.
Viewed through the lens of its 20-year history, TRACE has been a crucial driver of greater market transparency, investor protection, and the ongoing evolution of fixed-income markets. Perhaps most importantly, the milestone serves as a reminder that the story of TRACE continues to be written. But for now, happy 20th anniversary, TRACE!
Stephanie Dumont is FINRA’s Executive Vice President of Market Regulation and Transparency Services. Ola Persson is Senior Vice President of Transparency Services.