Transparency, in the form of the ticker tape, has been around in equity investing since at least the mid-1800s, when a telegraph machine disseminated market information. Even before that, messengers on horseback traveled back and forth, providing the price of trades to market participants.
The stock market hasn’t really known a time without such transparency, yet the concept only emerged in the US bond market in 2002 with the creation of the Trade Reporting and Compliance Engine (TRACE). Just 20 years later, it’s hard to imagine the world of fixed income without TRACE.
Created by the Financial Industry Regulatory Authority (FINRA), TRACE marked a major advance for the US bond market. Its launch represented the first time the fixed income space had near-real-time price dissemination, and it was a game-changer.
TRACE ensures equal access to reliable bond information and enhances the integrity of the market by requiring the reporting of over-the-counter transactions in eligible fixed income securities within 15 minutes of execution. For market participants, this has generally resulted in lower trading costs.
Since 2002, the price transparency and improved oversight made possible by TRACE have contributed to narrower bid-ask spreads and have fueled capital markets growth. At Dimensional, the transparency TRACE provides has allowed us to apply our systematic investment approach to a broader swath of fixed income offerings.
When Dimensional launched its first bond strategy in 1983, we focused initially on government bonds and high-quality corporate bonds because of the lack of transparency elsewhere in the market. However, the development of TRACE, along with a shift in how clients viewed the role of fixed income in their portfolios, sparked an evolution in fixed income solutions at the firm.
We spent several years conducting robust research into credit markets based on the newly available data. The result was a more thorough view of the full corporate bond market, which ultimately informed the firm’s variable-credit approach and then helped shape other offerings. TRACE also provides Dimensional with additional opportunities for enhancing our risk management processes, further development of our inventory modeling, and a deeper trade-cost analysis that helps us measure our flexible approach relative to others.
Without such transparency in the bond market, transacting across the bond market would likely be costlier for all market participants.
TRACE’s dissemination of timely and relevant information has set the global standard when it comes to bond market transparency. Like anything, though, there is always room for improvement.
Dimensional has historically advocated for further transparency in the fixed income market by expanding the types of securities required to be reported through TRACE. Over time, we have seen some of these advocacy efforts pay off—for example, FINRA will now require that trades in USD-denominated foreign sovereign debt securities be reported through TRACE,1 and the US Treasury has announced that it is exploring the possibility of additional post-trade transparency in the Treasury securities market.2 Dimensional also continues to advocate for increased immediacy in data dissemination—FINRA has recently proposed shortening the reporting time frame from 15 minutes to one minute—as well as increased specificity on large trade sizes. We have publicly supported each of these regulatory developments because, as we have learned over the last 20 years, such transparency fosters a fair and efficient market, which benefits all investors.