Markets: Transparency and the Corporate Bond Market

For decades, corporate bonds primarily traded in an opaque environment. Quotations, which indicate prices at which dealers are willing to transact, were available only to market professionals, most often by telephone. Prices at which bond transactions were completed were not made public. The U.S. corporate bond market became much more transparent with the introduction of the Transaction Reporting and Compliance Engine (TRACE) in July 2002. Beginning that date, bond dealers were required to report all trades in publicly issued corporate bonds to the National Association of Security Dealers, which in turn made transaction data available to the public. In this paper, we describe trading protocols in the corporate bond market and assess the impact of the increase in transparency on the market. We review how TRACE has affected the costs that corporate bond investors paid to bond dealers for their transactions. We canvass the opinions of a variety of finance professionals and consider articles in the trade press to obtain a broader view of the impact of transparency on the corporate bond market.