Junk bond traders: Trace system not helping volume problems

By Stephanie N. Rotondo

Portland, Ore., March 25 - Amid the problems in the junk bond sector, traders are renewing their belief that the NASD Trace bond tracking system is doing more harm than good.

"It has just crushed the market," said one trader. "Every trade is transparent. You try to take a risk and it is hard to make a position."

"It has changed the way we do business," he added.

Trace debuted in October 2004. The goal of the system was to allow bond traders, who before had limited means of tracking transactions within the market, the ability to see trading activity, including pricing and volume.

"The whole purpose of Trace was to bring the same kind of transparency in the corporate bond market as there is in the equity market," said Herb Perone, FINRA spokesman.

According to Perone, retail investors make up 65% of all trades in the bond market. Given that, Perone said, it is FINRA's responsibility as a regulator to help educate the investors.

"Historically, investors are active in markets they understand and not as active in markets they do not understand," he noted.

"Why should an investor get more information when they buy into a company by buying stock than when they would get when they lend money to a company by buying a bond?" he added.

But traders say the system has not lived up to its hype.

"It has destroyed this business," another source said. "It has ruined everything," including pricing.

"It kills you if you want to long or short something," he added, as other traders can use the system to research previous transactions. "It takes all the speculation out of it."

In fact, the trader credited Trace as the reason "hundreds of people are out of jobs."

"Revenues are down," he said. At his shop, he said that revenue had decreased about one-third since the inception of Trace.

"Volume has slowed down to a crawl," a trader said, citing the current market conditions. However, according to the trader, "we were already heading that way because of Trace."

"It's frustrating," he said. "You want to bang your head against a table."

And while no one is connecting the current turmoil in the market to Trace, some believe that if the system were not in place, there might be more activity.

"I don't think they are connected," a trader said, "but it never helps."

Without Trace, he added, "people would be happy in this market. They could make a lot of money."

"It has just stifled everything," he said.

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