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Transparency and the Corporate Bond Market

William F. Maxwell

SMU - Cox School

Hendrik Bessembinder

Arizona State University

Journal of Economic Perspectives, 2008

The U.S. corporate bond market underwent a fundamental change with the introduction of TRACE in 2002. Beginning on 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 assess the impact of the increase in transparency on the corporate bond market. Investors have benefited from the increased transparency, through substantial reductions in the bid-ask spreads that they pay to bond dealers to complete trades. Conversely, bond dealers have experienced reductions in employment and compensation, and dealers' trading activities have moved toward alternate securities, including syndicated bank loans and credit default swaps. The primary complaint against TRACE is that trading is more difficult as dealers are reluctant to carry inventory and no longer share the results of their research. In essence, the cost of trading corporate bonds decreased, but so did the quality and quantity of the services formerly provided by bond dealers. The debate regarding optimal transparency of the corporate bond markets continues, and the question of what degree of transparency in security markets is desirable will remain the subject of study and debate for the foreseeable future.

Number of Pages in PDF File: 30

Keywords: corporate bonds, transparency, TRACE

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Date posted: January 10, 2008  

Suggested Citation

Maxwell, William F. and Bessembinder, Hendrik, Transparency and the Corporate Bond Market. Journal of Economic Perspectives, 2008. Available at SSRN: http://ssrn.com/abstract=1082459

Contact Information

William F. Maxwell (Contact Author)
SMU - Cox School ( email )
Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States
Hendrik (Hank) Bessembinder
Arizona State University ( email )
PO Box 873906
Tempe, AZ 85207
United States
Feedback to SSRN

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