Finra to add Trace reporting for agencies in 2010; move will narrow bid-ask spreads, trader says

By Kenneth Lim

Boston, Sept. 29 - The Financial Industry Regulatory Authority's trading engine will include agency debt in March 2010 in a move that could narrow bid-ask spreads.

Finra said its Trade Compliance and Reporting Engine (Trace) will include debt issued by federal government agencies, government corporations and government sponsored enterprises as well as primary market transactions in new issues beginning March 1, 2010.

"Transparency is a crucial ingredient for investor participation in a market," Finra chairman and chief executive Richard G. Ketchum said in a statement. "Based on our experience with corporate bonds, this expansion should help all investors, and especially retail investors, to better monitor their executions by putting immediate and accurate sales and pricing information in their hands."

The expansion could also help regulators, Ketchum added.

"For regulators, there is a demonstrated need for increased bond market information, particularly as we move forward from financial crisis," he said. "Enhanced disclosure in these markets will allow proactive oversight and a deeper understanding of market dynamics."

Trace, which currently tracks only corporate bonds, will report prices, trade sizes, overall market sizes and market participants.

Michael Skinner, an agency trader at Wall Street Access, expects bid-ask spreads to tighten with the inclusion in Trace.

"Spreads are already fairly narrow to begin with, but it will narrow spreads even more," he said. "I think it will help the retail investor."

He acknowledged that smaller spreads could hit the earnings of traders.

"As a trader you like to have a bigger bid and ask because there's more of an opportunity to make money," he said. "It potentially could hurt profitability somewhat."

But Skinner sees other benefits from the move that could benefit investors and traders.

"I guess the offset will be that everyone will know where things are trading," he said.

Better reporting could also boost the size of the market.

"It's a pretty active market to begin with, but I think it can only help," Skinner said. "Someone who's afraid to buy the small callable deals, maybe they will now be more comfortable."

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