Views on improving the integrity of global capital markets
23 September 2014

Big Market Data: Finra Proposals to Bolster Dark Pool, Bond Market Transparency

Posted In: Market Structure

One reason trading innovations can create such concerns among investors is that the mechanics behind financial markets are so densely shrouded. For anyone who’s ever tried to study, for instance, the effects of broker internalization on equity markets has quickly realized how difficult it is to get data on things like the over-the-counter markets that are fundamental to markets. Making matters worse, there is limited historical information available that can provide context to the changes taking place in the market structure.

Well, it appears that may be set to change, thanks to a bevy of new rule proposals that the Financial Industry Regulatory Authority, or Finra, is preparing to submit for public comment. Give Finra its due, these kinds of rules on transparency are long overdue.

In particular, Finra will propose, among others, the following:

  • Alternative trading systems, or ATSs, would have to provide equity order book information to Finra that currently isn’t available in the Order Audit Trail System, or OATS.
  • Finra would publish non-ATS over-the-counter volume — read as executed through a broker-dealer internalization network — on a two- or four-week delayed basis.
  • Finra member firms would have to synchronize their computer system business clocks to the National Institute of Standards and Technology atomic clock, with allowable drift of between 50 and 200 milliseconds, to reduce trade latency between markets and firms.
  • Finra member firms would have to identify nonmember broker-dealers to OATS when receiving orders from such firms.

While the proposals have yet to appear on Finra’s website, it appears that CFA Institute would be supportive of these proposals. The one item in the list above that might cause concern is the substantial delay on reporting non-ATS over-the-counter volume. We will see what justification is provided for such slow reporting, but it is hard to believe it is needed.

Finra also announced several other pending proposals related to increased fixed-income market transparency. Among the proposals would be a requirement that ATSs report quote data for corporate bonds and agency debt to Finra, including the identity of the party submitting the quote and the price. While Finra says it will keep the information to itself initially, it also said it would seek public comment on whether to publicly disclose the quote data as part of increased pre-trade transparency. These are issues CFA Institute considered a couple of years ago in a research report on transparency in European debt markets.

A second proposal would seek Securities and Exchange Commission approval to require member firms to use the Trade Reporting and Compliance Engine, or TRACE, to identify trades with nonmember affiliates. The rule would require firms to separately identify when such trades occur on an intra-day basis at the same price.

Most of these matters are fairly arcane matters, dealing with technical reporting changes that may or may not help investors. But by proposing to increase data capture and transparency about how the bond and equity markets function, Finra will be going a long way toward removing the shroud and seeing how and where trading takes place and, by doing so, allowing for a better view into the state of the markets. That should be a step in the right direction.

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Photo credit: iStockphoto/Trout55


About the Author(s)
Jim Allen, CFA

Jim Allen, CFA, is head of Americas capital markets policy at CFA Institute. The capital markets group develops and promotes capital markets positions, policies, and standards.

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