TRACE, Market Research and Policy Making
For 20 years, FINRA’s Trade Reporting and Compliance Engine, known as TRACE, has contributed to reduced trade execution costs, facilitated price formation, aided regulatory programs and protected investors, as detailed in a recent blog commemorating this milestone anniversary. As an economist, I’d argue TRACE’s impact extends. For me, some of the real impact is in the research it has enabled.
Strong, independent analysis plays a pivotal role in policy debates. And healthy and robust policy debates are central to all aspects of FINRA’s oversight of the broker-dealer industry including our work to write and enforce rules, examine firms for compliance, foster market transparency and educate investors. All of this is done in the name of investor protection and market integrity.
From the beginning of TRACE 20 years ago, FINRA engaged independent researchers to evaluate the impact of transparency in fixed income markets, recognizing the important role this research could play when it comes to policy making. And the resulting findings helped FINRA, market participants and the public better understand the impact of TRACE. It importantly informed our thinking about the costs, benefits and best ways to expand transparency in fixed income markets. FINRA continued this practice of engaging independent research when TRACE was expanded to cover 144A bonds, securitized products and other segments of the market.
To further advance the opportunity for robust and informed independent research, FINRA created a dedicated dataset specifically for academic research with anonymized reporters and delayed publication, available since 2017. This dataset permits researchers to conduct analysis that otherwise would be impossible and study a broader range of questions to better understand how fixed income markets work. This research, in turn, provides more robust information to policymakers, such as FINRA and the Securities and Exchange Commission.
TRACE has become a critical resource for researchers to understand fixed income markets in the U.S. today. A Google Scholar search shows that there are more than 1,500 papers referencing TRACE data, covering corporates bonds, mortgage and asset backed securities, fixed income ETFs and mutual funds.
- These studies utilizing TRACE data have covered topics ranging from the effects of transparency on liquidity and costs (Edwards et al., 2007, Bessembinder et al., 2006 and Goldstein et al., 2007); the market structure of fixed income trading in the U.S. (Bessembinder et al., 2020); efficiencies from market-wide central clearing (Fleming, et al., 2021); price efficiencies of ETFs and mutual funds (Cici et al., 2011); underwriting and capital formation (Goldstein et al., 2019); the systemic impacts of the insurance industry (Chen et al., 2013) and measuring and assessing the impact of government intervention during financial crises and bankruptcy law (IOSCO report 2022).
- In more recent papers, academics have used TRACE data to study a variety of questions related to the amount and type of liquidity provision in fixed income markets (Bao et al., 2018 and Bessembinder et al., 2018). Studies analyzing the corporate bond market during the COVID-19 crisis and the electronic evolution of the corporate bond market also utilized TRACE data (O’Hara et al., 2021, O’Hara et al., 2021). And staff economists of the Federal Reserve Board have published papers and articles using Trace for Treasuries (Fleming et al., 2022, Harkrader et al., 2020).
- In addition to the links to the sample studies above, FINRA also maintains a webpage on some of the independent studies that evaluate TRACE's impact on liquidity, valuation and other aspects of the U.S. corporate bond market.
This body of research illustrates that TRACE has not only allowed regulators like FINRA to use TRACE data to better evaluate market conditions (e.g., Mizrach 2015, He and Mizrach 2017) and assess the need for and impact of rulemaking (e.g., Amendments to Require Identification of Portfolio Trades, Proposed Pilot Program to Study Recommended Changes to Corporate Bond Block Trade Dissemination, Proposal to Enhance TRACE Reporting for U.S. Treasury Securities), but importantly has allowed independent third parties to do the same. This contributes in a critical way to healthy and vibrant policy debate, and ultimately better-informed policy making.
As we at FINRA mark 20 years of TRACE, we can look back with satisfaction at the impact of making TRACE data available, in a measured and responsible way. We believe that good regulatory policy is informed by data, research and analysis. We support the idea that robust policy debate leads to better outcomes when many parties have access to fulsome information that allows them to study and analyze relevant questions - and we are committed to providing that access to data in a way that maintains the privacy of individuals and protects well-functioning markets. FINRA will continue to support and encourage inquiry that helps us to be a more responsible and responsive steward of investor protection and well-functioning markets.