Summary 

FINRA requests comment on a proposed pilot program to study changes to 

corporate bond block trade dissemination based on recommendations of the 

Securities and Exchange Commission’s (SEC) Fixed Income Market Structure 

Advisory Committee (FIMSAC or Committee). Specifically, the proposed pilot 

is designed to study two primary changes recommended by the FIMSAC: an 

increase to the current dissemination caps for corporate bond trades, and 

delayed dissemination of any information about trades above the proposed 

dissemination caps for 48 hours. The proposed pilot incorporates these 

primary elements of the FIMSAC Recommendation and other features, 

including a control group, designed to support a meaningful analysis of the 

pilot’s impact. 

Questions concerning this Notice should be directed to: 

00 Shawn O’Donoghue, Economist, Office of the Chief Economist (OCE), at 

(202) 728-8273 or shawn.odonoghue@finra.org; or Yue Tang, Economist, 

OCE, at (202) 728-8237 or yue.tang@finra.org; or 

00 Alex Ellenberg, Associate General Counsel, Office of General Counsel 

(OGC), at (202) 728-8152 or alexander.ellenberg@finra.org. 

Action Requested 

FINRA encourages all interested parties to comment on the proposal. 

Comments must be received by June 11, 2019. 

Comments must be submitted through one of the following methods: 

00 Emailing comments to pubcom@finra.org; or 

00 Mailing comments in hard copy to: 

1

Regulatory Notice 19-12

Trade Reporting and 

Compliance Engine (TRACE) 

FINRA Requests Comment on a Proposed Pilot Program 

to Study Recommended Changes to Corporate Bond 

Block Trade Dissemination 

Comment Period Expires: June 11, 2019 

April 12, 2019 

Notice Type 

00Request for Comment 

Suggested Routing 

00Compliance 

00 Fixed Income 

00 Legal 

00Operations 

00Research 

00 Systems 

00 Trading 

00 Training 

Key Topics 

00 ETFs 

00 Fixed Income 

00 TRACE 

00 TRACE-Eligible Security 

00 TRACE Transaction Data 

00 Trade Reporting 

Referenced Rules & Notices 

00Notice to Member 06-01 

00Notice to Members 03-73 

00Notice to Member 03-12 

00Notice to Members 01-18 

00Regulatory Notice 17-23 

00Regulatory Notice 13-35 

00Rule 6710 

00Rule 6730 

00Rule 6750 

00 SEC Rule 144A 
Marcia E. Asquith 

Office of the Corporate Secretary 

FINRA 

1735 K Street, NW 

Washington, DC 20006-1506 

19-12 April 12, 2019

To help FINRA process comments more efficiently, persons should use only one method to 

comment on the proposal. 

Important Notes: The only comments that FINRA will consider are those submitted pursuant 

to the methods described above. All comments received in response to this Notice will be 

made available to the public on the FINRA website. Generally, FINRA will post comments as 

they are received.1 

Before becoming effective, the proposed rule change must be filed with the SEC pursuant to 

Section 19(b) of the Securities Exchange Act (SEA).2 

Background and Discussion 

FINRA’s Trade Reporting and Compliance Engine (TRACE) provides information to investors 

and other market participants about secondary market trades in corporate bonds and 

other debt securities. Currently, TRACE disseminates information to the marketplace about 

corporate bond trades, including trade price and size, immediately upon receipt. FINRA 

launched TRACE in 2002 following an SEC staff review of the U.S. debt markets and a 

corresponding call for FINRA “to develop systems to receive and redistribute [corporate bond] 

transaction prices on an immediate basis.”3 As FINRA noted at the time, it had worked closely 

with the SEC, the dealer community and other market participants “to ensure that TRACE 

maximizes transparency, while optimizing liquidity.”4 

To promote transparency without negatively impacting liquidity, FINRA adopted a measured, 

phased approach to corporate bond trade dissemination that began in 2002 with the most 

actively traded and liquid bonds.5 In 2003, FINRA phased in dissemination for transactions in 

smaller investment grade (IG) issues,6 and in 2005 FINRA expanded dissemination for noninvestment grade (non-IG) corporate bonds, with delayed dissemination for certain non-IG 

trades.7 Beginning in 2006, all over-the-counter (OTC) secondary market trades in corporate 

bonds were disseminated immediately upon receipt, except for trades executed pursuant 

to SEC Rule 144A.8 FINRA began immediate dissemination for trades in corporate bonds 

executed pursuant to SEC Rule 144A in 2014.9 

FINRA also leverages academic study to evaluate the impact of TRACE in support of its 

mission. FINRA performs and publishes economic analysis of TRACE impacts10 and it provides 

substantial support for independent research.11 Academic research generally has found that 

liquidity conditions proxied by aggregate activity have improved or have not deteriorated 

with the introduction of TRACE transparency. However, some market participants have raised 

concerns about difficulty executing block-size trades in recent years, and some have pointed 

to metrics or questions they feel are not fully addressed in the academic research, including 

turnover (aggregate trading activity as a fraction of total bonds outstanding) and the concept 

of unexecuted trades. 

2	 Regulatory Notice
The FIMSAC was empaneled by the SEC in 2017 “to provide the Commission with diverse 

perspectives on the structure and operations of the U.S. fixed income markets, as well 

as advice and recommendations on matters related to fixed income market structure.”12 

In particular, the FIMSAC has been asked to help the Commission ensure that regulation 

of the fixed income markets is designed “to meet the needs of retail investors, as well as 

companies and state and local governments.”13 

April 12, 2019 19-12

The state of bond market liquidity was the first issue taken up by the FIMSAC. Discussion at 

the first FIMSAC meeting cited a number of factors that may be impacting current liquidity 

conditions and the ability to execute block trades, including technology-driven changes to 

fixed income market structure and the regulation of bank capital.14 The FIMSAC discussion 

also identified the perceived dealer cost of TRACE’s immediate post-trade transparency as 

an area to study further. Following on this discussion, at the second FIMSAC meeting the 

Committee introduced a recommendation for a pilot to study specific changes to FINRA’s 

current post-trade transparency protocols for block-size trades in corporate bonds.15 The 

FIMSAC Recommendation includes two primary elements: an increase to the current trade 

size dissemination caps for large corporate bond trades, and a 48-hour dissemination 

delay for trades above the caps. While a majority of the FIMSAC ultimately approved the 

Recommendation, several members questioned aspects of the recommended pilot and 

raised concerns, which are discussed in more detail below. 

The proposed pilot described in this Notice, developed in consultation with SEC staff, 

incorporates the two primary elements of the FIMSAC Recommendation. It also includes 

elements designed to produce pilot data that can be measured against a baseline, so that 

the pilot’s effect can be assessed in relation to FINRA’s core regulatory objectives of market 

integrity and investor protection. 

Below, this Notice discusses: 

00 the current protocols for TRACE dissemination of corporate bond trades; 

00 research concerning the impact of TRACE dissemination; 

00 the FIMSAC Recommendation for a pilot; 

00 comments on the FIMSAC Recommendation; 

00 a description of FINRA’s proposed pilot; 

00 an analysis of the pilot’s expected economic impacts; and 

00 questions for comment on FINRA’s pilot proposal. 

As noted throughout, FINRA encourages comment on all aspects of a potential pilot, 

including the need for a pilot, the potential impact of a pilot, the proposed pilot design, the 

economic impact assessment and possible alternatives to a pilot. 

Regulatory Notice	 3
Current TRACE Dissemination Protocols 

19-12 April 12, 2019

Today, all OTC secondary market trades in TRACE-eligible16 corporate bonds must be 

reported to FINRA as soon as practicable, but no later than within 15 minutes of the time of 

execution.17 FINRA then publicly disseminates information about these trades immediately 

upon receipt.18 

FINRA currently applies dissemination caps to large-size trades in corporate bonds—i.e., 

trades that exceed $5 million for IG corporate bonds, and $1 million for non-IG corporate 

bonds.19 For trades at or below the caps, FINRA disseminates the security identifier, whether 

the trade was between dealers, or between a dealer and a customer or affiliate, whether 

the FINRA member involved in the trade bought or sold the security, and the price and full 

size of the trade. For trades above the dissemination caps, FINRA disseminates all of the 

same information, but with the size of the trade capped as “5MM+” (for IG) and “1MM+” 

(for non-IG). The full, uncapped size of trades above the caps is later published as part of an 

historical dataset six months after the calendar quarter in which they are reported.20 

Research Concerning the Impact of TRACE Dissemination 

Most of the empirical literature on corporate fixed income trading occurred after 

transaction prices became publicly available through TRACE beginning in 2002. The initial 

studies of transparency in the corporate bond market are summarized below. These studies 

used complementary methods and generally reached similar conclusions: that improved 

post-trade transparency is associated with lower transaction costs and price dispersion 

and not associated with greater trading volume for actively traded, recently issued and IG 

bonds. 

Goldstein, Hotchkiss and Sirri (2007) studied a set of BBB-rated bonds, phased into price 

dissemination in April 2003. In coordination with FINRA, the release of data was structured 

as a randomized experiment with a control group. They created a stratified sample of bonds 

to be disseminated along with controls of non-disseminated bonds. They reported that 

transaction costs on newly transparent bonds declined relative to bonds that experienced 

no transparency change, except for very large trades. They also reported that transaction 

costs declined as trade sizes increased, and did not demonstrate further decline on average 

for sizes above 1,000 bonds. One measure of transaction costs that FINRA’s proposed pilot 

will use is the dealer round-trip measure that is defined in Goldstein, Hotchkiss and Sirri 

(2007). 

Edwards, Harris and Piwowar (2007) also studied the impact of transparency on 

transactions costs. The authors employed a design that compared the experience of a 

set of bonds for which trades were disseminated through TRACE to another set that had 

not yet been made transparent. By comparing the two sets of bonds before and after the 

introduction of public dissemination, they were able to isolate the impacts of transparency 

directly. This type of analysis is referred to as a “difference-in-difference” methodology in 

the academic literature. Looking at data for the period between January 2003 and January 

4	 Regulatory Notice
2005, they found that dissemination was associated with lower trading costs for corporate 

bonds with larger issue size, better credit quality, more recently issued bonds and bonds 

closer to maturity. The empirical methodology for this proposed pilot is informed by 

Edwards, Harris and Piwowar (2007), as it examines the impact of a dissemination delay 

by comparing trading behavior before versus after its implementation, and uses the same 

measure of transaction costs. Another closely related paper by Bessembinder, Maxwell 

and Venkataraman (2006) used insurance company transaction data before July 2002 to 

find that improved information in disseminated bonds improved market quality for nondisseminated bonds. This study also showed a reduction in institutional trading costs 

around the initiation of TRACE reporting in July 2002. 

April 12, 2019 19-12

In more recent papers, academics have studied a variety of questions that are related 

to transparency using TRACE corporate bond data. Harris (2015) found that the lack 

of a consolidated quote system in bond markets limits the ability of retail and smaller 

institutional investors to observe best available prices. A consequence of this opacity is 

that brokers may arrange trades at prices inferior to those readily available. Bao, O’Hara 

and Zhou (2018) and Bessembinder, Jacobsen, Maxwell and Venkataraman (2018) found 

empirical evidence that the Volcker Rule reduced the willingness of dealers to commit 

capital to market making. Financial institutions also attribute some of their decline in 

capital commitment to fixed income trading to the greater capital costs associated with 

higher bank capital requirements. This decline is attributable to bank-affiliated dealers, as 

non-bank dealers have increased their capital commitment. Schultz (2017) and Choi and 

Huh (2017) found that there has been a greater move to riskless principal trading away 

from trading that would be intermediated by dealers relying on dealer inventory. Jacobsen 

and Venkataraman (2018) examined the impact of post-trade reporting of Rule 144A 

corporate bond transactions. They found that TRACE dissemination had no measureable 

impact on turnover or dealers’ participation in interdealer trades, facilitation of block 

transactions or willingness to hold inventory. Small dealers increased market share and 

reduced the cost advantage of large dealers. 

Dick-Nielsen and Rossi (2016) found that hedge funds and buy-side traders fill the void 

created by reduced bank involvement in market making, and concluded that this change 

is associated with less immediacy and demands greater customer patience. In addition, 

another study finds that mutual funds are an important source of liquidity supply when 

other investors sell bonds (Wang, Zhang and Zhang 2018). Furthermore, Anand, Jotikasthira 

and Venkataraman (2018) found that some bond mutual funds exhibit a persistent 

trading style that provides liquidity by absorbing dealer inventory positions. Cici, Gibson 

and Merrick (2011) focused on the dispersion of month-end valuations placed on identical 

bonds by different mutual funds when calculating net asset value (NAV). They found 

that this bond price dispersion declined over their sample period, and may be related to 

improved transparency in the corporate bond market from TRACE. 

Regulatory Notice	 5
FIMSAC Recommendation for Block Pilot 

19-12 April 12, 2019

At the second FIMSAC meeting on April 9, 2018, the FIMSAC’s Transparency Subcommittee 

introduced a Preliminary Recommendation for a Pilot Program to Study the Market 

Implications of Changing the Reporting Regime for Block-Size Trades in Corporate Bonds. At 

the same meeting, the FIMSAC modified and approved the Recommendation by a vote of 

15 to four.21 

The FIMSAC Recommendation includes two primary elements. First, it would increase the 

current dissemination caps from $5 million to $10 million for IG corporate bonds, and from 

$1 million to $5 million for non-IG corporate bonds.22 This would result in the dissemination 

of additional size information for trades between the current and proposed caps. Second, 

the Recommendation would delay dissemination of any information about trades above 

the proposed $10 and $5 million caps for at least 48 hours.23 This would result in no price 

or size transparency for these trades during the dissemination delay period. After 48 hours, 

the trade price and capped size of the trade would be disseminated and the full size of the 

capped trade would be published three months after the calendar quarter in which the 

capped trade was reported to FINRA, rather than the current six-month delay. 

The following example illustrates where the Recommendation would decrease price 

transparency. Today, for an IG trade with a size of $11 million par value, FINRA disseminates 

immediately upon receipt the price of the trade, and a capped trade size ($5MM+). 

Under the Recommendation, for the same trade, no information about the trade would 

be disseminated for 48 hours. After 48 hours, the trade’s time of execution, the price of 

the trade and a capped trade size ($10MM+) would be disseminated. A second example 

illustrates where the Recommendation would increase size transparency, with no change 

to price transparency. Today, for an IG trade with a size of $6 million par value, FINRA 

disseminates immediately upon receipt the price of the trade, and a capped trade size 

($5MM+). Under the Recommendation, for the same trade, FINRA would disseminate 

immediately upon receipt the price of the trade and the full, uncapped trade size. 

The FIMSAC included data tables in its Recommendation that help estimate the impact of 

the recommended changes. Between 2013 and 2017, there was an average of 350 trades 

per day above the proposed $10 million cap for IG corporate bonds. These are the trades in 

IG corporate bonds for which no information would be disseminated for at least 48 hours 

(different from today, where there is immediate dissemination of price and other trade 

information but with the size capped). As noted in the FIMSAC Recommendation, these 

trades represented 1.2% of the total number of trades and 32.6% of total par value traded. 

Similarly, there was an average of 545 daily trades in non-IG corporate bonds above the 

proposed $5 million cap that would be subject to the dissemination delay and withheld for 

48 hours. These trades represented 3.2% of the total number of trades and 40.8% of total 

par value traded. 

6	 Regulatory Notice
 

For pilot design, the FIMSAC Recommendation proposed that the new dissemination 

protocols apply to all trades in TRACE-eligible corporate bonds for a period of one year, 

subject to an early termination mechanism linked to market quality indicators. The FIMSAC 

Recommendation did not contemplate a control group. It also identified a list of proposed 

measurement criteria that contemplate the evaluation of, in relation to the current 

dissemination protocols, average daily trading volume of capped and uncapped trades, the 

number of capped and uncapped trades, the proportion of volume in block trades, the price 

impact of block trades, transaction cost analysis, and changes in dealer capital, inventory 

and behavior. 

April 12, 2019 19-12

The FIMSAC Recommendation did not include written supporting rationale. During 

discussion at the April 9th meeting, the Recommendation was framed as exploring the 

balance between transparency, which was said to promote efficient markets through lower 

search costs and greater price competition, and too much transparency, which was said 

could impair liquidity and market quality in certain market segments if it increases risk in 

the provision of capital or the likelihood of market impact.24 As explained by the chair of 

the Transparency Subcommittee, the Recommendation was based on a “general consensus 

. . . within the [Transparency Subcommittee] and also through outreach to other market 

participants that maybe the corporate bond market – restraints in the corporate bond 

market, especially for larger blocks, wasn’t working as it should and was perhaps being 

hindered by some of the TRACE reporting requirements.”25 

Proponents of the Recommendation stated at the meeting that that a dissemination delay 

could help encourage dealers to provide more block liquidity. One panelist at the meeting 

stated that dealers “have a very asymmetric risk profile when [they] bid or offer a block 

of securities to a client,” and he offered data to show declining trade size between 2007 

and 2017.26 The same panelist further noted that a two-day dissemination delay would 

allow his firm to recycle 50% of block trade risk, while today it recycles 30% of block trade 

risk on T+0 (the date of the block trade). Proponents also discussed the ways they believed 

the Recommendation would benefit institutional investors, the people those institutions 

represent and individual investors.27 

Others, however, raised questions during the meeting about the Recommendation. One 

member of the FIMSAC and the Transparency Subcommittee strongly urged the inclusion 

of a control group in the study design.28 Another FIMSAC member asked whether the 

Recommendation’s increase in size transparency was a sufficient balance against the 

complete reduction in transparency for block-size trades during the dissemination delay.29 

Other points of discussion included the impact of reduced price transparency on investors,30 

and potential pilot gaming or manipulation by dealers.31 

Regulatory Notice	 7
 

Comments on FIMSAC Recommendation 

19-12 April 12, 2019

Nine comments have been submitted to date on the FIMSAC Recommendation.32 

Four commenters expressed support for the Recommendation, while five opposed it. 

Commenters generally addressed the need for the block pilot advanced by the FIMSAC 

Recommendation, the potential impact of the pilot and pilot design. 

Comments on the Need for the Pilot 

Commenters that supported the FIMSAC Recommendation generally felt the pilot was 

needed based on their view of market conditions for block-size trades in corporate bonds. 

SIFMA stated that “block size transactions have become substantially more difficult to 

execute and counterparties are more frequently choosing to break up blocks into smaller 

transactions or delay transactions to avoid market frictions.” SIFMA’s statement is based 

on the observation of its members that there has been a “decline in the proportion of block 

trades to total volume during a period associated with an increase in the average and 

median size of corporate bond new issues.”33 

JPMorgan Chase also commented that “[p]roviders of liquidity accept heightened risk 

when transacting in block trades, and these trades are immediately disclosed to the market 

with masked trade sizes.” According to JPMorgan Chase, “as a result of this immediate 

disclosure, broker dealers now prefer smaller trade sizes on average, particularly for less 

liquid and lower rated bonds” and adjust their pricing to reflect the cost of immediate posttrade transparency.34 Similarly, Eaton Vance stated that “[f]inding block trade size liquidity 

in the market is often difficult,” and that “[t]he quick publication of all post-trade prices 

is a significant cause of this difficulty.”35 Eaton Vance explained that immediate TRACE 

dissemination of trades reduces dealers’ incentives to provide block-size liquidity because 

immediate post-trade transparency “lowers transaction costs for market participants, but 

imposes costs on the Market Makers who give up valuable information on trade details 

without having received any pre-trade benefit.” 

In contrast, three FIMSAC members jointly submitted a comment letter that disagreed 

with the Recommendation and questioned the FIMSAC’s justification for the pilot. In the 

Harris Letter, these FIMSAC members took issue with the argument that immediate trade 

dissemination—in place currently—imposes material additional costs on dealers that 

need to be addressed.36 According to the Harris Letter, despite dealer concerns about being 

“front run” after printing large trades, it is not likely that other traders will sell ahead of 

the block dealer either because they would not want to sell a bond they’ve chosen to own, 

or because it is expensive to sell bonds short. The Harris Letter further stated that, “in 

comparison to equity markets, the price moves associated with fundamental information 

in the bond markets—especially for IG bonds—are small so that the profits associated with 

front running are not likely large.” To the extent dealers encounter significant price impact 

when engaging in block trades, the Harris Letter contended that dealers “can reduce that 

impact by selling slowly,” and that market structure should not “favor large traders to the 

detriment of smaller traders.” 

8	 Regulatory Notice
 

The Harris Letter also pointed to alternative explanations—besides TRACE post-trade 

transparency—to explain changes to large dealer inventory and capital commitment.37 

Specifically, the Harris Letter cited as primary factors the growth of electronic trading and 

competition with traditional dealers from new liquidity-providing proprietary trading firms, 

and post-financial crisis bank regulation that has affected the willingness or ability of 

bank-affiliated dealers to commit capital. In addition, the Harris Letter noted as secondary 

factors a decrease in bond volatility because of low interest rates and substantial economic 

growth. 

April 12, 2019 19-12

Comments on the Potential Impact of the Pilot 

JPMorgan Chase supported the FIMSAC Recommendation on the grounds that “the 

recommended pilot would provide a data-driven approach to consider regulatory changes 

and calibrate a well-tailored transparency regime.”38 According to JPMorgan Chase, “[t] 

ransparency is important to the price discovery process, but the risk of mis-calibration is 

significant, with the potential to undermine the overall functioning of the market.” SIFMA 

similarly stated that “[t]he pilot recalibration recommended by the SEC FIMSAC offers an 

opportunity to better balance both transparency and liquidity objectives to promote health 

and robust markets.”39 Eaton Vance supported the Recommendation because it believes 

the pilot “will encourage market participants to target larger trade sizes in order to take 

advantage of the forty-eight hour dissemination delay,” and “produce more liquidity in 

block size trades” as a result.40 

On the other hand, several commenters expressed concern about the potential impacts 

of the pilot. The Harris Letter observed that “[s]ubstantial empirical evidence has shown 

that public dissemination of TRACE trade reports has saved public investors about $1B/ 

year.”41 The Harris Letter contended that, by reducing price transparency during the 48-

hour dissemination delay, “[t]he proposed change will transfer power and thus wealth 

from receiving investors, who are typically smaller investors, to dealers and the large block 

initiating traders.”42 The Harris Letter further stated that that such a transfer “is inefficient 

as dealers undoubtedly would capture some or even much of the benefit of knowing the 

block trade prices,” and it questioned the value of the Recommendation’s proposal to 

increase size transparency by raising dissemination caps. In addition, the Harris Letter 

expressed concern that delayed dissemination of block-size trades could mislead the 

market about supply and demand conditions, with particular impacts on smaller dealers. 

The Harris Letter offered the following example: “if a dealer crosses $20 million in bonds 

from one seller to four buyers each buying $5 million on a riskless-principal basis, under the 

recommended proposal, FINRA would delay dissemination of the $20 million dealer buy 

report but would immediately disseminate reports [for] each of the $5M dealer sales. The 

immediately disseminated reports would give the appearance of surplus buying demand 

and the possibility that one or more dealers have been left short facilitating this customer 

demand.”43 

Regulatory Notice	 9
Similarly, The Credit Roundtable, an organization of institutional fixed income managers, 

objected to the Recommendation’s proposed 48-hour dissemination delay, which it 

believed would create information asymmetry that would ultimately benefit “broker/ 

dealers, very large institutional investors, and high frequency leveraged players at the 

expense of other participants in the corporate bond market.”44 Vanguard also objected 

to the significant reduction in price transparency that would be caused by a 48-hour 

dissemination delay. Vanguard expressed concern that imposing a dissemination delay 

on a third of recorded market volume “could have a meaningful negative impact on daily 

price discovery and execution costs while advantaging a segment of market participants 

over others.”45 Vanguard further observed that “[b]y bifurcating the market into those with 

access to information and those without, [the FIMSAC Recommendation] may even create 

additional barriers to entry for newer or smaller market participants, and further entrench 

those with the largest market positions.”46 

19-12 April 12, 2019

Separately, two Exchange Traded Fund (ETF) market makers expressed concerns that the 

Recommendation would diminish price transparency in the corporate bond markets and 

degrade the market for overlying ETFs and other related derivatives. Jane Street stated 

that a 48-hour dissemination delay “would introduce a material amount of information 

asymmetry and adverse selection to the corporate bond market.”47 As a result, Jane Street 

noted it would need to adjust its behavior when trading with a block liquidity provider 

because of the risk the block liquidity provider has information about large block trades it 

executed that have not yet been disseminated to the market. Specifically, Jane Street stated 

it would be forced to widen its quotes for corporate bond ETFs, and “that wider spreads 

in ETFs would impose significant costs on ETF end-users, who are in substantial part retail 

investors.”48 Flow Traders offered similar observations about ETF spreads and also pointed 

to other derivative products, like total return swaps, credit default swaps and the credit 

default swap index, that would become more difficult to price because of the information 

asymmetry that would be created by the Recommendation.49 Vanguard also stated that 

diminished price transparency would create pricing challenges for market makers who 

create and redeem ETFs, which would translate into higher costs for ETF investors.50 

Comments on Pilot Design 

Several commenters provided specific feedback on particular elements of the 

FIMSAC’s recommended pilot design. JPMorgan Chase suggested that the non-IG 

dissemination cap should be raised to $3 million, as originally proposed in the FIMSAC 

Preliminary Recommendation, instead of $5 million, as proposed in the final FIMSAC 

Recommendation.51 With respect to the FIMSAC Recommendation’s proposed 

measurement criteria for the pilot, JPMorgan Chase stated that the objective criteria 

concerning trading activity should be measured separately for bonds with large and 

small outstanding values to compare impact across issue sizes. JPMorgan Chase further 

suggested that, to the extent price impact or transaction cost analysis are studied, the 

calculation methodology should be better defined. And JPMorgan Chase questioned 

whether the proposed measurement criteria concerning changes in dealer capital and 

inventory, or changes in dealer behavior, should be included at all, because they could be 

influenced by other factors outside the pilot and therefore misleading. 

10 Regulatory Notice
The Harris Letter proposed to change the pilot design altogether. The Harris Letter 

recommended a decrease in the dissemination caps, from $5 million to $2.5 million 

for IG, and from $1 million to $750,000 for non-IG.52 The Harris Letter stated that the 

decrease “would protect the dealers by further hiding the full sizes of the blocks that 

they have purchased and must distribute,” but “the receiving investors would still know 

the actual trade prices.” To offset its proposed decrease in size transparency, the Harris 

Letter recommended publishing the full size of IG trades between $1 and $10 million, and 

non-IG trades between $750,000 and $2.5 million, two market days after they occur, and 

publishing the full size of larger IG and non-IG trades four market days after they occur. 

April 12, 2019 19-12

Vanguard expressed concern that if the FIMSAC Recommendation were to proceed 

without a control group, the study would result in “data that is open to misinterpretation.” 

Vanguard specifically noted that volume alone is not an appropriate measure of 

success in fixed income markets and urged more comprehensive data study before the 

implementation of a pilot. In addition, Vanguard stated that the proposed thresholds 

for delayed dissemination in the FIMSAC Recommendation—i.e., the proposed increased 

dissemination caps of $10 million for IG corporate bonds and $5 million for non-IG 

corporate bonds—are “far too low” and “could lead to gaming and data distortions that 

would impair the credibility of the results.”53 

Description of FINRA’s Proposed Pilot 

FINRA is soliciting comment on a proposed modified pilot design based on careful study 

of the FIMSAC Recommendation and associated comment letters, and after consultation 

with SEC staff. FINRA’s modifications are intended to allow for a more meaningful study 

of the pilot’s impacts on market integrity and investor protection, including large investors 

who trade in block sizes, smaller investors who do not, and investors in derivative or other 

related markets. 

Proposed Pilot Design 

As discussed in this Notice, the FIMSAC Recommendation essentially combines two 

different proposed changes to the current transparency framework. First, it proposes to 

increase the number of trade reports that would report the full size of the transaction, 

which effectively increases size transparency for those trades. And second, it proposes a 

complete dissemination delay for trade reports above the new dissemination cap size, 

which effectively reduces price (and other information) transparency for those trades. 

Because the FIMSAC Recommendation includes elements designed both to increase and 

decrease transparency for different size trades, FINRA’s primary challenge is to design a 

pilot that can reasonably assess the impact of the different changes proposed, and the 

trade-off between them, without imposing unnecessary costs and disruptions to markets 

and market participants. 

Regulatory Notice	 11
The proposed pilot would last for a duration of one year. As the FIMSAC recommended, 

and based on consultation with SEC staff, the pilot would be subject to early termination 

if market quality indicators demonstrate a significant disruption. The pilot would include 

non-convertible, callable and non-callable TRACE-eligible corporate debt securities, except 

for bonds issued by religious organizations or for religious purposes (e.g., church bonds), 

and equity-linked notes. New issues would be included in the pilot the first day after they 

begin trading in the secondary market. There would be three pilot study groups and one 

control group. The three test groups are: 

19-12 April 12, 2019

00 Test Group 1, which would study a 48-hour dissemination delay with no change to the 

current dissemination caps. In other words, for bonds in this test group, TRACE would 

apply a 48-hour dissemination delay to trades above $5 million in IG corporate bonds, 

and trades above $1 million in non-IG corporate bonds. 

00 Test Group 2, which would study increased dissemination caps with no change to the 

current dissemination timeframes. In other words, for bonds in this test group, TRACE 

would increase dissemination caps to $10 million for IG corporate bond trades and $5 

million for non-IG corporate bonds trades, without applying a 48-hour dissemination 

delay. 

00 Test Group 3, which would study both a 48-hour dissemination delay and increased 

dissemination caps. In other words, for bonds in this test group, TRACE would apply a 

48-hour dissemination delay to trades above $10 million in IG corporate bonds, and 

trades above $5 million in non-IG corporate bonds. 

Similar to the SEC’s approach to test and control group creation for its recently adopted 

Transaction Fee Pilot, FINRA proposes to implement stratified sampling for this pilot in a 

manner that permits comparison between each test group and the control group.54 Pilot 

bonds would be stratified along the characteristics of bond issue size, age of bond issue, 

bond rating and 144A status. 

FINRA would use these variables to create categories, or buckets, of bonds. Bonds in each of 

the buckets will be randomly assigned before the start of the pilot to the four pilot groups 

(three test and one control), with Test Groups 1, 2 and 3 each containing one-third of the 

bonds randomized to the control group. 

These stratification variables are proposed because they have been identified as capturing 

differences in liquidity among corporate bonds (Bessembinder, Jacobsen, Maxwell and 

Venkataraman 2018). For example, investors may trade larger offerings more than 

smaller ones simply because they are more liquid at the issuance date due to their size. 

Alternatively, larger offerings are usually issued by large issuers. Large issuers, in turn, 

may have better informational environments, thereby reducing the cost of acquiring 

information about the issuer. This may make the bonds more liquid. Similarly, younger 

bonds could be more liquid than older ones because the time to maturity is greater for a 

12 Regulatory Notice
 

given transaction cost. Should investors believe that credit ratings truly proxy for credit 

worthiness, they may prefer to transact in corporate bonds with higher ratings. Different 

credit ratings may also attract different type of traders which could affect their liquidity. 

Lastly, corporate bonds subject to Rule 144A may trade differently than non-144A corporate 

bonds.55 

April 12, 2019 19-12

FINRA further proposes to rotate pilot bonds halfway through the pilot. After 126 days 

of trading—there are approximately 252 trading days per year—bonds that are initially 

randomized to one of the test groups would be rotated to the control group, and the bonds 

initially in the control group would be divided equally into the three test groups. The sole 

exceptions to the rotation approach would be bonds that are newly issued close to the 

rotation date, or bonds that default during the pilot. New issues that trade fewer than 50 

total trading days before rotation occurs on the 126th day of the pilot would not be moved 

from the test or control group to which they were initially randomized, and bonds that 

default would not be moved from the test or control group to which they were initially 

randomized. Rotation of the bonds between test and control group is intended to address 

concerns that test and control assignment could impose unfair costs and burdens.56 

FINRA understands that a potential consequence of the proposed rotation is that market 

participants may have different expectations about the impact of delayed dissemination 

or an increase in cap size for test and control group bonds at the pilot’s start than at the 

time when rotation occurs. As a result, the evidence generated from the first half of the 

pilot may differ from that of the second half. If so, interpretation may be more difficult 

because of potential differences that may arise from latent differences in bond assignment 

to a given test group as market participants update expectations from learning. However, 

if market participants quickly understand the impact of a change in transparency, then 

bonds initially randomized to a given Test Group in the first 126-day period are likely to 

be affected in a similar manner by the same change in transparency when bonds in the 

control group are randomized to the same Test Group in the second 126-day period. The 

list of existing CUSIPs assigned to each Group will be publicly posted before the proposed 

pilot begins and before rotation. In addition, the list of assigned CUSIPs will be updated 

throughout the term of the pilot as new issues are assigned to pilot groups. 

Regulatory Notice	 13
Methodology 

19-12 April 12, 2019

This section provides a high-level description of the proposed criteria for evaluating the 

impact of the pilot. 

The primary method proposed to evaluate the impacts associated with the pilot is a 

“difference-in-difference” method used by academics to identify changes in transparency 

on corporate bond trading from the implementation of TRACE. The benefit of employing 

this method is that it is generally accepted as an effective way to assess changes in 

transparency for corporate bonds and it permits a comparison of the pilot’s findings to 

earlier studies. There are two types of comparisons that are made in this difference-indifference pilot design. The first comparison is the effect of a change in transparency on 

a given outcome variable by comparing the outcome variable’s average change over time 

for a Test Group versus its control group. For example, one may examine the difference 

in average transaction costs between bonds in Test Group 1, which would be subject to a 

dissemination delay, versus those in the control group, which would not be subject to a 

dissemination delay. The second comparison is the effect of a change in transparency on a 

given outcome variable by comparing the outcome variable’s average change over time for 

one Test Group versus another Test Group. For example, one may examine the difference 

in average transaction costs between bonds in Test Group 1, which would be subject to 

a dissemination delay, versus those in Test Group 2, which would be subject to increased 

dissemination caps. 

By construction, Test Group 1 reduces transparency by introducing a dissemination 

delay. The identification strategy is to compare the effect of the dissemination delay on 

outcome measures, such as aggregate trading volume including the amount attributable to 

institutional and non-institutional sized trades, transaction costs and market participation 

for bonds in Test Group 1 versus the control group and bonds in Test Group 1 versus Test 

Group 2 or 3. 

Test Group 2 potentially improves size transparency, with no change to price transparency, 

by increasing the dissemination cap, thereby increasing the number of bond trades subject 

to uncapped dissemination, without imposing any dissemination delay. This identification 

strategy compares bonds in Test Group 1 versus the control group and bonds in Test Group 

2 versus Test Group 1 or 3. 

Test Group 3 combines these two primary elements of the FIMSAC Recommendation. By 

construction, it potentially mitigates the reduction in transparency relative to Test Group 

1 by increasing the dissemination caps, thereby increasing the number of bond trades 

subject to real-time, uncapped dissemination and reducing the number of trades that are 

subject to a dissemination delay. At the same time, Test Group 3 reduces transparency 

relative to Test Group 2 by introducing a dissemination delay for the size capped trades. 

This identification strategy compares the effect of the dissemination delay with increased 

cap size to the control group in addition to the other two test groups. Test Group 3 permits 

a comparison of the joint effect of the dissemination delay or increased cap size relative to 

trades affected by a lower threshold for a delayed dissemination alone in Test Group 157 or 

an increased cap alone in Test Group 2. 

14 Regulatory Notice
The proposed pilot tests delayed dissemination versus a new trade size dissemination 

cap. Such a design permits those evaluating the pilot to discriminate between the relative 

impacts of each of those changes and assess the trade-off between the two elements. In 

this framework, for example, the public would be able to assess directly how any benefits 

arising from increasing the trade size dissemination cap offsets any costs associated with 

delaying any dissemination of larger sized trade reports. Without this framework, such a 

comparison would likely be extremely uncertain. 

April 12, 2019 19-12

In order to best provide this comparability, the proposed pilot would extend the trade delay 

beyond the FIMSAC Recommendation to the current trade size dissemination caps in one of 

the test groups for the duration of the pilot. The FIMSAC Recommendation does not provide 

evidence for the basis of the thresholds recommended. If those thresholds best reflect 

the trade-off between investor protection and well-functioning markets, extending the 

reporting delay to more trades may impose greater costs than intended by the FIMSAC. 

FINRA considered alternatives that would potentially avoid these costs. One option 

considered was to limit the dissemination delay in Test Group 1 to the FIMSAC 

recommended thresholds of $10 and $5 million respectively for IG and non-IG bonds, 

without increasing the dissemination caps for Test Group 1. In other words, under this 

alternative construction for Test Group 1, for an IG bond in Test Group 1, a trade with a size 

of $6 million par value would not be subject to the 48-hour dissemination delay and would 

be disseminated immediately according to current dissemination caps with a capped size 

of $5MM+. For the same IG bond under this alternative construction for Test Group 1, a 

trade with a size of $11 million par value would be subject to the 48-hour dissemination 

delay and would be disseminated after the delay according to current dissemination caps 

with a capped size of $5MM+. FINRA recognizes that such an alternative construction 

would conflate the impact of both the delay and the change in the dissemination caps. 

Accordingly, FINRA believes this alternative would be more likely to provide evidence that is 

harder to interpret. FINRA asks commenters to consider the importance of design and how 

it can affect the ability of FINRA, the SEC and the public to evaluate the outcome of the pilot 

in their comments. 

Outcome Measure and Research Questions 

As FIMSAC’s proposed pilot is a test of a joint hypothesis, FINRA suggests that the optimal 

experimental design is a direct test of the delay in the dissemination of block trades, an 

increase in the cap size and a dissemination delay combined with an increased cap size to 

determine whether dealers will provide increased liquidity for block trades. To this end, 

FINRA solicits comments on whether this proposed pilot can provide reliable answers to the 

following research questions organized by type of measure, and if so, how these questions 

would be measured empirically. 

Regulatory Notice	 15
1. Trade-based 

19-12 April 12, 2019

Is either a dissemination delay or a delay with increased cap associated with changes in 

aggregate trading activity? 

In particular, does a decrease in transparency: 

1. increase trading activity; 

2. increase liquidity58; 

3. decrease time between transactions; or 

4. decrease uncertainty/error in prices? 

2. Blocks and block activity 

Are there differences in block trading between groups at the threshold where the 

dissemination is delayed or the dissemination is delayed with increased cap? 

In particular, does a decrease in transparency: 

1. increase the frequency or size of block trades; 

2. decrease liquidity in block trades; or 

3. increase the time between block trades? 

3. Trading costs 

Is either a dissemination delay or a delay with increased cap associated with changes in 

trading costs for investors? 

In particular, does a decrease in transparency: 

1. decrease transaction costs (e.g., dealer roundtrip costs); or 

2. decrease costs from adverse selection (i.e., price impact)? 

4. Dealer behavior 

Is either a dissemination delay or a delay with increased cap associated with changes in 

dealer behavior? 

In particular, does a decrease in transparency: 

1. increase market making (measured as volume or inventory) of large broker-dealers 

that are active in blocks; 

2. benefit large broker-dealers that are active in blocks at expense of less informed 

ones in trades when block traders have an information advantage after the block 

executes but before that transaction is disseminated; or 

3. increase the probability of gaming by dealers, for example, altering their trading 

pattern to selectively release prices or make information more asymmetric? 

16 Regulatory Notice
5. Dealer compensation 

April 12, 2019 19-12

Is either a dissemination delay or a delay with increased cap associated with changes in 

dealer compensation? 

In particular, does a decrease in transparency: 

1. increase the likelihood of principal activity relative to agency trades; 

2. increase markups; 

3. decrease the size of dealer networks; or 

4. increase profitability of larger dealers at center of the dealer network? 

6. Buy side behavior 

Is either a dissemination delay or a delay with increased cap associated with increased 

adverse selection for less informed institutional investors? 

In particular, does a decrease in transparency benefit more informed institutional investors 

at expense of less informed institutional investors? 

7. ETFs, mutual funds and derivative markets 

Bond ETFs and bond mutual funds derive their value from an underlying basket of 

corporate bonds. Efficient pricing of these derivative baskets and their individual securities 

requires up-to-date information on the pricing of holdings. Is either a dissemination 

delay or delay with increased cap associated with more pricing errors in ETFs, mutual 

funds or derivatives? Are these delays associated with profitable trading strategies for 

these instruments by market participants that trade blocks of securities that underlie the 

instruments and are subject to delayed dissemination? 

In particular, does a decrease in transparency: 

1. decrease the accuracy of average ETF and mutual fund pricing; 

2. increase the information content in ETFs and mutual funds associated with more 

informed market participants relative to others; or 

3. increase profitable trading of derivatives by dealers that trade blocks in corporate 

bonds? 

Regulatory Notice	 17
Economic Impact Assessment 

19-12 April 12, 2019

FINRA developed the pilot proposal described in this Notice based on the FIMSAC 

Recommendation. The discussion below presents a framework to evaluate the potential 

economic impacts of the specific changes recommended by the FIMSAC. However, as 

discussed throughout the Notice, there are different views on the need for and potential 

impact of studying these changes as a pilot. As the SEC has discussed, pilot studies may 

be particularly useful to inform policy decisions where there is not sufficient empirical 

evidence otherwise available. For example, when the SEC adopted the Transaction Fee 

Pilot, it explained the pilot was needed because available data was too limited to permit 

researchers to isolate and study the contested policy issue in question—specifically, 

the impact of transaction fees on order routing behavior, execution quality and market 

quality. Accordingly, the SEC stated that the Transaction Fee Pilot was uniquely capable of 

generating the empirical evidence to inform regulatory decisions.59 The SEC further noted 

that better informed regulatory decisions generally are more likely to result in regulatory 

approaches that better balance costs and benefits relative to regulatory decisions based on 

less precise information.60 

The SEC also recognized that pilots may impose costs and can face limitations that may 

impact pilot design. The SEC noted that pilots can be unpredictable and may face the 

limitation that market participants may adjust their behavior differently for a pilot than 

for a rule change.61 In addition, while the pilot described in this Notice may impose less 

compliance cost because it does not require any change to the way market participants 

report trades to TRACE, the pilot likely will impose some costs on market participants to 

remain aware of the dissemination protocols associated with the bonds in each pilot group. 

This is in addition to the costs discussed below concerning the changes that would be 

implemented by the pilot. 

FINRA includes questions below and encourages comments on the need for and potential 

impacts of studying the recommended changes with a pilot, including whether the current 

data is sufficient or insufficient to inform the policy questions raised by the FIMSAC 

Recommendation, whether the proposed pilot’s benefits outweigh the costs, and whether 

other methods or data sets should be considered rather than a pilot to measure impacts or 

“lost opportunities” to trade. 

18 Regulatory Notice
 

Economic Baseline 

April 12, 2019 19-12

The current regime of post-trade transparency was created with the introduction of TRACE 

in 2002. Since then, as noted above, numerous studies examined the impact of TRACE posttrade transparency on the liquidity and competitiveness of the U.S. corporate bond market. 

The current market conditions inform the economic baseline and are the result of these 

impacts. The studies of the impacts serve as reference in evaluating the effect(s) of the 

pilot. 

Several papers examined the impact of transparency on realized bid-ask spread, which is 

considered either as a proxy for liquidity or the transaction cost of a customer roundtrip 

(completing a buy and sell of a corporate bond). These papers concluded that the increased 

transparency associated with TRACE transaction reporting is generally associated with a 

substantial decline in investors’ trading costs and the cost reduction is greater for smaller 

trade sizes, potentially accruing to retail investors.62 Researchers also found reductions 

in intraday price dispersion, which could translate into reductions in trading costs.63 

Some studies found that trading volume in the dealer market had remained the same or 

decreased with the introduction of TRACE; a possible explanation was that TRACE might 

have helped trading volume shift to the electronic platform.64 Other studies examined 

the impact on dealer competition and found evidence of increased competitiveness of 

small dealers.65 Finally, another study found improved valuation precision of mutual funds 

holdings in the presence of increased TRACE transparency.66 

This section briefly describes the market for corporate bonds as captured by the TRACE 

dataset, focusing on the sample of transactions in pilot eligible corporate instruments 

reported to TRACE in calendar year 2018. Pilot-eligible securities are defined as nonconvertible, callable and non-callable TRACE-eligible corporate debt securities, including 

144A bonds (and excluding religious institution bonds and equity linked notes). 

Table 1 presents secondary market trading statistics of corporate bonds grouped by the 

bond characteristics used for stratification in the pilot. In particular, it shows the number of 

CUSIPs, total par value traded and mean par value per trade in calendar year 2018.67 TRACE 

data indicates that 32,408 bonds were traded in 12.4 million transactions during calendar 

year 2018. During that same period the total par value traded was $7.0 trillion, and the 

average par value per trade was $561.4 thousand. 

Regulatory Notice	 19
19-12 April 12, 2019

20 Regulatory Notice
Table 2 describes the mean number of trades and par value traded by CUSIP and per day in 

calendar year 2018. The average bond was traded 384 times with a total traded par value 

per CUSIP of $215.3 million in 2018. An average of 49,524 trades representing $27.8 billion 

in par value exchanged hands per day. Larger issues were traded more frequently and 

typically in larger trade size. 

April 12, 2019 19-12

Regulatory Notice	 21
Table 3 reports the number of issues, trades, total and mean par value traded per day by 

rating and trade size for all corporate bonds in the year 2018. The table indicates that there 

were significantly more trades in smaller size than in larger institutional sizes, yet this is 

not true for the total dollar par value traded. For example, there were 31,628 trades of less 

than $1 million per day for investment grade bonds, but only 403 trades of larger than $10 

million. Yet the total par value traded in less than one million dollar trades is $2.8 billion, 

compared to $6.3 billion for trades larger than $10 million. 

19-12 April 12, 2019

22 Regulatory Notice
Figure 1 presents the number of new issuances per year by type, grade and size for each 

year from 2009 to 2018. The period post-2009 shows a strong secular growth in new 

corporate bond issuance. The issuance of non-IG, non-144A and smaller issue size (size less 

than $500 million) corporate bonds increased 536% from 2009 to 2018. The issuance of IG, 

non-144A corporate bonds increased for all issue sizes. 

April 12, 2019 19-12

Regulatory Notice	 23
Figure 2 presents the par value of new issuances per year by type, grade and size for each 

year from 2009 to 2018. For non-144A and non-IG issues, issuances of less than $500 

million increased 48.3%, $500 million to $1 billion increased 39.8%, while larger than $1 

billion decreased 21.6%. For non-144A and IG issues, issuances of less than $500 million 

increased 2.4%, $500 million to $1 billion increased 92.9%, while larger than $1 billion 

increased 24.5%. 

19-12 April 12, 2019

Figure 3 shows secondary market trading of corporate bonds in TRACE from 2013 to 2018.68 

The sample reflects the set of corporate bonds proposed to be included in the pilot. To 

account for the difference in total bonds outstanding across years, annual traded dollar par 

value is standardized by the total dollar par value of outstanding bonds as of June 30th of 

the corresponding year. 

Figure 3-1 indicates that there has been some time series variation in IG bond turnover, but 

the aggregate difference over the period is very small ranging from 0.608 in 2013 to 0.602 

in 2018. There appears to be at least some secular growth in the turnover from smallest 

and largest trade size groupings. Figure 3-2 represents the share that each trade size group 

represents as a fraction of all trading activity. In this view, the share of trades in IG bonds 

less than $1 million increased from 13.4% in 2013 to 15.0% in 2018. The share of trades 

larger than $10 million increased from 32.1% in 2013 to 33.8% in 2018. 

24 Regulatory Notice
For non-IG bonds, Figure 3-3 shows that total turnover increased from 76.4% in 2013 to 

94.2% in 2018. Turnover is generally increasing for smaller trade sizes. Figure 3-4 shows 

that the share of trades less than $1 million increased from 11.2% in 2013 to 14.6% in 2018. 

The share of trades larger than $10 million decreased from 20.0% in 2013 to 17.6% in 2018. 

April 12, 2019 19-12

Regulatory Notice	 25
Economic Impacts 

19-12 April 12, 2019

A discussion of the anticipated economic impacts, including costs and benefits associated 

with each pilot test group, is presented below. Based on the sample population affected 

by the pilot, approximately 3% and 18% of trades and 56% and 85% of par volume in 

investment grade and non-investment grade bonds may be candidates subject to delayed 

dissemination at some point during the pilot. Similarly, based on the sample population 

affected by the pilot, approximately 2% and 15% of trades and 22% and 45% of par volume 

in investment grade and non-investment grade bonds may be candidates potentially 

affected by the pilot cap size change. These estimates do not account for changes in 

behavior in response to the pilot. 

Test Group 1: 48-hour Dissemination Delay with No Change to Dissemination Caps 

Potential Benefits 

The primary goal of the FIMSAC Recommendation is to test whether delayed 

dissemination of reported transactions can increase liquidity in blocks, without imposing 

significant indirect and direct costs on market participants and investors. The FIMSAC 

Recommendation and supporting comments cite observational evidence that finding 

block-size liquidity in the current market (i.e., the baseline) may be difficult because of the 

relatively quick publication of post-trade prices. Although TRACE post-trade transparency 

lowers transaction costs for market participants, proponents of the dissemination delay 

believe that post-trade transparency may impose costs on dealers and other liquidity 

providers by making public valuable trade information. When larger trades are publicly 

disseminated, dealers with recently acquired blocks may be more vulnerable to adverse 

price movements from traders who are aware of these recent executions. This may cause 

larger trades to incur greater costs for dealers, which could reduce the incentive for them 

to provide liquidity in blocks or require them to receive greater compensation for providing 

block liquidity. 

Under this rationale, providing a delay in dissemination for larger trade sizes could be 

associated with greater provision of liquidity to those seeking to conduct larger trades. 

Delayed dissemination of large trades could provide dealers with more time to offset 

positions. During the delayed dissemination, dealer positions may be less vulnerable 

to price movements that negatively impact profits, because other traders have less 

information on these recent large trades. Consequently, existing dealers of large trade 

sizes may trade larger trade sizes more frequently, further increase the size of larger trades, 

or offer more attractively priced quotes. The benefits from the dissemination delay may 

disproportionately accrue to dealers who trade larger sizes, if transaction prices convey 

information about bond quality or future prices that are no longer shared. 

26 Regulatory Notice
Institutional investors may also benefit, as they may trade faster or more frequently 

because dealers might find counterparties faster or carry more inventory. In addition, 

institutional investors might save time and effort in contacting dealers for quoted prices, 

as more dealers may be willing to provide aggressively priced bid-ask quotes or trade in 

larger size. If liquidity in larger trade sizes improves for particular bonds and these bonds 

are a close substitute for bonds that are typically more costly to trade, then institutional 

investors may benefit from substituting a more liquid bond for a less liquid one. 

April 12, 2019 19-12

This benefit may be limited to the extent block-size trades are not relatively more difficult 

to execute in the current market, as suggested in certain of the baseline data discussed 

above. 

Potential Costs 

Dealers and institutional investors that regularly transact in these larger block sizes would 

have more non-public information during the dissemination delay than in the absence 

of the pilot. This may give them an even greater competitive advantage during that 48-

hour dissemination delay window relative to market participants who do not typically 

trade these larger blocks. Back, Liu and Tequia (2018) theoretically showed that disclosure 

of transaction prices conveys information on the security’s quality and reduces dealer’s 

rents when trading inventory in the secondary market. Consequently, the reduction in 

transparency could potentially reduce information content of prices and could increase 

dealers’ rents. Dealers and institutional investors that trade larger sizes may profit from 

this informational advantage on trade prices at the expense of dealers and investors that 

do not larger block sizes. 

This economic rent is a cost imposed by Test Group 1 from the perspective of market 

participants not regularly transacting in blocks subject to the 48-hour dissemination 

delay. Smaller brokers that do not regularly trade blocks benefitting from the 48-hour 

dissemination delay may be more likely to provide less attractively priced quotes, thereby 

increasing trading costs, or reduce the size at a given quoted price. Under this scenario, 

retail traders may find increased costs and lower returns from participating in the corporate 

bond market. Furthermore, some institutional investors and less active dealers may need to 

contact more dealers, thereby increasing search costs. 

Delayed reporting of large trades could increase price uncertainty to less informed traders, 

thereby potentially reducing liquidity in corporate bonds. Delayed block price reporting 

exposes buy and sell side participants to additional risk, as they may be transacting at 

prices inferior to those that they would have accepted had dissemination of block trades 

not been delayed. Limited information on large transactions is particularly problematic 

during periods of market stress when the benefit of timely pricing information is large. 

It may also introduce misleading information to the market about supply and demand 

conditions, with particular impacts on smaller dealers, as noted in the Harris Letter. 

Regulatory Notice	 27
An implicit assumption of the FIMSAC Recommendation is that an increase in the size 

or frequency of block trades or improved ability for dealers to manage inventory risk 

associated with block trades will improve fixed income market quality. In addition to 

the informational advantages that might accrue to dealers participating in block trades 

discussed above, the ability of those dealers to reduce their inventory risk exposures more 

quickly or more easily where they take on large positions may effectively represent a risk 

transfer between those dealers and the ultimate holders of the securities. The aggregate 

efficiency of the transfer depends, in part, if the resultant prices reflect the risk transfer and 

on whether the dealer or the ultimate customer represents the most efficient holder of the 

risk. 

19-12 April 12, 2019

Authorized participants (APs) are important to the creation and redemption process for 

exchange-traded funds (ETFs). These market participants have the exclusive right to change 

the supply of ETF shares on the market. When they identify a shortage of ETF shares in the 

market, they create more shares by buying the underlying corporate bonds. Conversely, 

when there’s an excess supply of ETF shares on the market, they reduce the number of ETF 

shares by selling the underlying corporate bonds. Price transparency helps ensure that APs 

and other market makers engaged in deposit and redemption transactions continue to 

participate in the markets. As their trades facilitate liquidity transfer, they tend to stabilize 

prices. This creation and redemption mechanism keeps the share price of an ETF aligned 

with its underlying NAV. 

The impact of delayed reporting may well have an amplified effect on securities deriving 

their value from corporate bonds. The impact could lead to less efficient pricing of indexbased products, such as ETFs, and derivatives, such as total return and credit default 

swaps. If the pilot makes it more difficult to mark-to-market the relevant securities, market 

participants, who do not trade blocks benefitting from delayed reporting dissemination, 

may be more likely to use stale prices for operational and accounting purposes. For 

example, ETFs and mutual funds may incorrectly estimate net asset value with greater 

probability. In addition, market makers that do not trade these blocks may not be able 

to confidently assess the price at which the basket of bonds and bonds should trade. 

Consequently, market makers may provide less attractively priced quotes or be less willing 

to take on inventory. Such an outcome could suppress innovation, such as electronification 

of the corporate bond market. 

There is a potential for spillover effects in demand and liquidity for bonds that trade less 

frequently, because these instruments are typically priced using matrix pricing or other 

relative valuation methods. In this view, decreasing certainty about the primary instrument 

could lead to greater market uncertainty about securities whose value is assigned on a 

relative basis, whether or not those bonds are likely to trade in block size. 

28 Regulatory Notice
Test Group 2: Increased Dissemination Caps with No Dissemination Delay 

April 12, 2019 19-12

Potential Benefits 

The incremental increase in size transparency is limited to observing the actual size on 

trades between $1 million and $5 million for non-IG and between $5 million and $10 

million for IG corporate bonds. There is no change in price transparency in Test Group 

2 relative to the baseline. If transaction costs are decreasing in trade size (as found by 

Edwards, Harris and Piwowar (2007)) and the differences in trade size within this group 

are economically important, then the increased transparency with respect to size may help 

some investors better interpret the price for trades. This would potentially improve price 

formation for these bonds and for ETFs and other derivatives that contain bonds that are 

frequently traded in the size between $1 and $5 million and between $1 and $10 million 

for non-IG and IG corporate bonds. 

Potential Costs 

If the optimal size trade for some institutional investors is between $1 and $5 million and 

$5 and $10 million for non-IG and IG corporate bonds, then a change in the dissemination 

caps could impose costs, such as price impact, on these institutional investors or on overall 

market efficiency. 

If these same investors choose to trade in a size above the new $5 and $10 million cap 

thresholds, then delayed reporting of large trades may encourage traders to trade blocks 

with qualifying size rather than the typical smaller blocks or blocks broken into smaller 

pieces. This could decrease price and size transparency, which may distort incentives to 

trade slowly and responsibly. 

Test Group 3: 48-Hour Dissemination Delay and Increased Dissemination Caps 

Potential Benefits and Costs 

Test Group 3 has the same potential benefits that are described above for Test Group 1 and 

2. These benefits are not outlined again for the purpose of brevity. 

However, the increase in dissemination caps limits the costs and benefits to Test Group 1 

to only those trades executed at sizes above the increased trade dissemination caps of Test 

Group 2. This is anticipated to mitigate the informational advantage accruing to dealers 

and institutional investors who trade blocks created by the 48-hour dissemination delay 

that is evaluated in Test Group 1. 

Regulatory Notice	 29
Alternatives Considered 

19-12 April 12, 2019

As discussed above, FINRA considered but is not proposing to design the pilot without a 

control group, as the FIMSAC recommended. 

Also discussed above, FINRA considered alternate specification of Test Group 1 to limit its 

application to only those trades with reported size at or above the new dissemination cap 

recommended by the FIMSAC. 

In addition, consistent with another part of the FIMSAC proposal, FINRA considered 

disseminating the actual trade size of capped transactions three months instead of six 

months after the end of the calendar quarter in which they are reported. The rationale for 

not proposing this modification is: (1) its impact on block size trades in corporate bonds 

would be difficult to evaluate given the pilot’s proposed duration is one year, and (2) it 

would add additional complexity to the pilot. 

Finally, FINRA considered a number of alternatives in the specification of the pilot, including 

the set of bonds eligible for the pilot, the characteristics necessary for control in the 

stratified assignment to test groups and the appropriate length of time for the pilot. FINRA 

requests comments on these topics. 

Request for Comment 

FINRA requests comment on all aspects of the proposal. FINRA requests that commenters 

provide empirical data or other factual support for their comments wherever possible. 

FINRA specifically requests comment concerning the following questions: 

Comments on the Need for the Pilot 

1. Is there a need for this pilot? What evidence can you provide to support this 

conclusion? 

2. Is the objective of the pilot clearly defined? 

Comments on the Potential Impact of the Pilot 

1. What potential impacts of the pilot does this proposal fail to consider or 

inadequately describe? 

2. Are there particular risks, economic or otherwise, inherent in a pilot that reduces 

transparency that already exists in the marketplace? 

3. One suggested need for the pilot is that block size transactions have become 

substantially more difficult to execute and may result in breaking the block into 

smaller transactions. To the extent blocks have in fact become more difficult to 

trade, is this a valid concern? Do potential delays in block size trades and related 

strategies to execute those block trades, such as more smaller-size trades, lead 

to a more accurate and appropriate risk transfer? Would delays in dissemination 

improperly mask the risk of block-size trades to the individual firm and instead 

shift such risk to other market participants or the overall market? 

30 Regulatory Notice
4. FINRA cannot directly measure the impact on “lost opportunities,” particularly 

to asset managers. How would this negatively impact the success of the pilot? 

What other measure or data sets should FINRA consider in order to measure “lost 

opportunities” to trade? 

April 12, 2019 19-12

5. Are there ways market participants can alter their behavior during the course 

of the pilot to affect its outcome? What are other similar negative impacts or 

concerns that could occur as a result of the pilot? What changes can FINRA make to 

the pilot design to limit or mitigate the impact of such “gaming”? 

Comments on Pilot Design 

1. Is the pilot adequately designed with respect to its objective? 

2. Are Test Groups 1, 2 and 3 and the control group clearly defined? 

3. What should the test groups be? 

4. Is it appropriate to have a market-wide pilot or should it be limited to a small 

number of CUSIPs? 

5. Should other types of securities, aside from corporate bonds, be included in the 

pilot? 

6. Should the corporate bond CUSIPs in Test Groups 1, 2 and 3 switch with those 

in the control group with respect to the three treatments, which are the 

dissemination delay, dissemination cap, dissemination cap and delay? 

7. Should all of the CUSIPs in each test group be published or should some or all not 

be made known? 

8. Should the pilot include a control group? 

9. Should the test groups be designed such that the impact is limited to the 

thresholds identified in the FIMSAC Recommendation? Is it appropriate to expand 

the test in the way proposed in the pilot design here? 

10. Does the pilot propose to use the most appropriate outcome measures? If not, 

which ones are preferable and why? 

11. Is the proposed methodology of examining pilot data appropriate? 

12. Are the dimensions on which the corporate bonds are sorted (size of issue, age 

of issue, rating and 144A versus non-144A categories) appropriate? If not, which 

additional dimensions should be included (e.g. inclusion status with respect to an 

index or ETF, maturity, standardized versus complex, degree of substitutability for 

other CUSIPs, mean frequency of trading in prior year, etc.)? 

13. Are there other methods that could be used to determine the control and test 

groups? For example, should the corporate bonds be assigned to the control group 

and test groups by a more random approach—such as based on the last digit 

of the CUSIP for each bond, instead of assigning bonds to groups based on the 

stratification characteristics like those discussed above (size of issue, age of issue, 

rating and 144A status)? 

Regulatory Notice	 31
14. How should FINRA seek to measure the impact of the pilot on assets that derive 

their value from corporate bonds, such as ETFs and mutual funds? 

19-12 April 12, 2019

15. Should the pilot’s duration be increased to two years to better incorporate trading 

in illiquid corporate bonds? 

16. Is there a risk that traders can easily substitute CUSIPs in a test group for ones 

in the control group? If so, to what extent might this happen and on which 

dimensions (e.g. CUSIP from the same issuer, CUSIP from a different issuer having 

the same maturity and age)? 

17. Are there additional research questions that should be addressed? 

18. Are there other changes to the pilot that should be considered to better study the 

impact of dissemination (i.e., transparency) on the corporate bond market? 

19. Should the dissemination delay or caps only apply to trades on which a brokerdealer makes a capital commitment? 

20. Will market participants and other users of the TRACE data need to make any 

system changes as a result of the pilot? For example, will pricing, compliance or 

other systems, including systems used to determine or supervise prevailing market 

price for fair pricing and calculating mark-ups for retail and other customers, need 

to be updated to reflect delayed dissemination of certain trades? If so, how long 

will those changes take to implement and what would be the estimated costs 

associated with such changes? 

21. Should new issues be randomized to test groups or the control group while 

controlling for the issuer? 

Comments on the Economic Impact Assessment 

1. Does the economic baseline accurately describe current trading of TRACEreportable corporate bonds? 

2. What will be the overall impact of the pilot on liquidity, trade size, competition 

among dealers or competition among issuers? 

3. With respect to the 48-hour dissemination delay (i.e., Test Group 1), have its 

benefits or costs be adequately described? 

a. Will the 48-hour dissemination delay improve liquidity for those trade sizes 

affected? If so, would transaction costs decline, or trade sizes or dealer 

inventory increase? Would buy-side firms need to contact fewer dealers for 

quotes? 

b. Would traders that do not typically trade the sizes affected by the 

dissemination delay be negatively affected by the informational asymmetry? If 

so, how? 

c. Would delayed reporting have an amplified effect on securities deriving their 

value from corporate bonds leading to ineffective pricing of index-based 

products, such as ETFs, and derivatives, such as total return and credit default 

swaps? 

32 Regulatory Notice
d. Would the reduced price transparency caused by the 48-hour dissemination 

delay have particular impacts on retail investors, for example, by reducing the 

market information used to determine prevailing market price for fair pricing 

and to calculate mark-ups? 

April 12, 2019 19-12

4. With respect to the increased dissemination caps (i.e., Test Group 2), have its 

benefits or costs been adequately described? 

a. Would the increase in the reporting cap size mitigate the informational 

advantage accruing to dealers and institutional investors who trade blocks 

created by the 48-hour dissemination delay? If so, would smaller dealers step 

in and begin providing quotes for trades having benefited from the increased 

reporting cap? 

b. If trade sizes do increase in response to the increase in the reporting cap size, 

are traders more likely to trade blocks with qualifying size rather than the 

typical smaller blocks or blocks broken into smaller pieces? 

5. With respect to the increase of the reporting cap size and the 48-hour 

dissemination delay (i.e., Test Group 3), have its benefits and costs relative to Test 

Group 1 or 2 been adequately described? 

6. The comparison of Test Group 3 and Test Group 1 is confounded by the increase 

in the threshold for the dissemination delay. Should FINRA consider the 

alternative construction for Test Group 1 discussed above, where Test Group 

1 would maintain the current size dissemination cap while implementing a 

delay threshold consistent with the threshold in Test Group 3? Would such an 

alternative construction for Test Group 1 provide a cleaner test of the impact of 

the dissemination delay? Would such an alternative construction for Test Group 1 

create complications that affect the implementation of the pilot? 

7. What impact would the dissemination delay or cap have on broker-dealer routing 

to or trades occurring on alternative trading systems or on electronic trading 

innovations? Are these impacts different from those experienced by those 

transacting OTC? 

8. Will the dissemination delay or cap create opportunities for market manipulation, 

and if so, what specific behaviors should either be measured or guarded against? 

9. The current assignment of CUSIPs to Test and control groups does not control 

for the issuer’s identity. If CUSIPs are not normally distributed by issuer across 

control and a particular Test Group or across Test Groups, will there be difficulty 

interpreting the empirical results? If so, how? 

10. Would assignment of an issuer to a particular Test Group change competition 

between issuers? If so, how? 

11. What will the impact on competition be between issuers when some issuers’ 

bonds are in the Test Groups versus the control group? 

Regulatory Notice	 33
12. Will the dissemination delay or cap have an impact on competition among dealers? 

Are dealers who trade larger blocks sizes likely to benefit at the expense of dealers 

who do not make such trades? If so, how will the dealer network be affected? 

19-12 April 12, 2019

13. Will the dissemination delay discourage institutional investors who do not trade 

larger block sizes from trading with those dealers who do trade larger block sizes? 

Alternatively, will the dissemination delay encourage institutional investors who 

do trade larger block sizes to selectively trade with those dealers who do not trade 

larger block sizes? 

Comments on Alternatives to Consider 

1. Should FINRA consider other potential designs, for example, as described in the 

Harris Letter? If so, what designs should be considered and how do they improve 

over the design described here? 

2. Should FINRA consider an alternate reporting design for the dissemination delay 

test group whereby brokers could report capped trades up to 48 hours after 

transaction and FINRA would disseminate the trade report when received? Under 

what conditions would brokers report capped trades earlier than the maximum 

delay permitted under the pilot? What are the costs and benefits associated with 

this approach? 

3. Should FINRA consider an alternate design that would study, in place of delayed 

dissemination, suppression of the buy/sell indicator for block-size trades in 

corporate bonds? As noted above, FINRA currently disseminates this indicator, 

among other information, for corporate bond trades. However, for trades in AssetBacked Securities (ABS), FINRA suppresses the buy/sell indicator (and information 

about contra party type) to balance concerns about transparency and liquidity 

in the ABS market, which is generally smaller and more institutional than the 

corporate bond market. What are the costs and benefits associated with an 

alternative approach that would study ABS-like dissemination protocols for blocksize trades in corporate bonds? 

4. Can the goals of the pilot be achieved through other means, such as study of 

currently available data or supplemented with other specific data requests? 

5. As discussed above, certain baseline data suggests that block-size trades in IG 

bonds have not become more difficult to execute. Does the current data support 

an alternative approach that would limit the study of delayed dissemination to 

non-IG bonds? What are the costs and benefits associated with such an alternative 

approach? 

34 Regulatory Notice
	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	

	 	

	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	

		

	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	

	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	

	 	 	 	 	

	 	 	

April 12, 2019 19-12

Endnotes 

1.	 Persons submitting comments are cautioned 

that FINRA does not redact or edit personal 

identifying information, such as names or email 

addresses, from comment submissions. Persons 

should submit only information that they wish 

to make publicly available. See Notice to Members 

03-73 (November 2003) (NASD Announces Online 

Availability of Comments) for more information. 

2.	 See Section 19 of the Securities Exchange Act of 

1934 (SEA) and rules thereunder. After a proposed 

rule change is filed with the SEC, the proposed rule 

change generally is published for public comment 

in the Federal Register. Certain limited types of 

proposed rule changes, however, take effect upon 

filing with the SEC. See SEA Section 19(b)(3) and 

SEA Rule 19b-4. 

3.	 See Securities Exchange Act Release No. 43873 

(January 23, 2001), 66 FR 8131 (January 29, 2001) 

(Order Approving File No. SR-NASD-99-65) (citing a 

speech by SEC Chairman Levitt, September 9, 1998, 

at Media Studies Center, New York, NY). 

4.	 See NASD Press Release: NASD Launches TRACE 

Bond Trade Data System (July 1, 2002). 

5.	 See Notice to Members 01-18 (March 2001). 

6.	 See Notice to Members 03-12 (February 2003). 

7.	 See Notice to Members 06-01 (January 2006) 

(describing the categories of non-IG trades that 

were subject to delayed dissemination, specifically, 

newly issued securities rated BBB or lower, and 

non-IG transactions greater than $1 million). 

8.	 See id. 

9.	 See Regulatory Notice 13-35 (October 2013). 

10.	 See FINRA Office of the Chief Economist Research 

Note: Analysis of Corporate Bond Liquidity (2015). 

11.	 See FINRA catalogue of TRACE Independent 

Academic Studies, available at www.finra.org/ 

industry/trace/trace-independent-academicstudies. 

12.	 See Securities Exchange Act Release No. 81958 

(October 26, 2017), 82 FR 50460 (October 31, 

2017) (Notice of Federal Advisory Committee 

Establishment for the Fixed Income Market 

Structure Advisory Committee). 

13.	 See SEC Press Release 2017-209, SEC Announces 

the Formation and First Members of Fixed Income 

Market Structure Advisory Committee (November 

9, 2017), available at www.sec.gov/news/pressrelease/2017-209; see also Opening Remarks of 

Chairman Jay Clayton at the Inaugural Meeting 

of the Fixed Income Market Structure Advisory 

Committee (January 11, 2018), available at www. 

sec.gov/news/public-statement/opening-remarksinaugural-meeting-fixed-income-market-structureadvisory (emphasizing the “long term interests of 

retail investors”). 

14.	 See Transcript of FIMSAC Meeting (January 11, 

2018), available at www.sec.gov/spotlight/ 

fixed-income-advisory-committee/fimsa-011118-

transcript.txt. 

15.	 See Recommendation for a Pilot Program to Study 

the Market Implications of Changing the Reporting 

Regime for Block-Size Trades in Corporate 

Bonds (April 9, 2018), available at www.sec.gov/ 

spotlight/fixed-income-advisory-committee/ 

fimsac-block-trade-recommendation.pdf (“FIMSAC 

Recommendation”). 

16.	 Rule 6710 generally defines a “TRACE-Eligible 

Security” as: (1) a debt security that is U.S. dollardenominated and issued by a U.S. or foreign private 

issuer (and, if a “restricted security” as defined 

in Securities Act Rule 144(a)(3), sold pursuant to 

Securities Act Rule 144A); or (2) a debt security 

that is U.S. dollar-denominated and issued or 

guaranteed by an “Agency” as defined in Rule 

6710(k) or a “Government-Sponsored Enterprise” as 

defined in Rule 6710(n). 

17.	 Rule 6730 (Transaction Reporting) describes 

members’ TRACE reporting obligations. 

Regulatory Notice	 35
	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	

	 	

	 	 	 	 	 	 	 	

	 	

	 	 	

	 	

	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	

	 	 	

	 	 	

	 	 	

	 	 	

	 	 	

	 	 	

	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

19-12 April 12, 2019

18.	 See Rule 6750 (Dissemination of Transaction 

Information). 

19.	 See, e.g., Securities Exchange Act Release No. 71607 

(February 24, 2014), 79 FR 11481 (February 28, 

2014 (Order Approving File No. SR-FINRA-2013-046) 

at 11483 n. 30 (describing the IG and non-IG 

dissemination caps). FINRA notes that bonds 

without ratings are generally treated as non-IG for 

current TRACE dissemination purposes. See Rule 

6710(i) (stating that “if a TRACE-Eligible Security 

is unrated, FINRA may classify the TRACE-Eligible 

Security as a Non-Investment Grade security”). 

20.	 See Regulatory Notice 17-23 (July 2017). 

21.	 See Transcript of FIMSAC Meeting (April 9, 2018), 

available at www.sec.gov/spotlight/fixed-incomeadvisory-committee/fimsa-040918transcript.txt 

(“April 9th FIMSAC Transcript”). 

22.	 The FIMSAC Transparency Subcommittee’s 

preliminary recommendation proposed to increase 

the dissemination cap for non-IG corporate bonds 

from $1 million to $3 million; during discussion 

at the FIMSAC meeting, the recommended new 

dissemination cap for non-IG corporate bonds was 

increased from $3 million to $5 million. 

23.	 This document refers generally to a 48-hour 

dissemination delay for shorthand. However, 

as the FIMSAC Recommendation noted, the 

dissemination delay is at least 48 hours, because 

trades reported after normal TRACE hours will be 

disseminated more than 48 hours after execution 

time. In addition, FINRA believes the FIMSAC 

Recommendation intended that the 48-hour 

delay would not include any hours from days on 

which TRACE was not open, such as weekends and 

holidays. 

24.	 See April 9th FIMSAC Transcript at pg. 13-14 

(opening remarks of Brett Redfearn, Director, 

Division of Trading and Markets). 

25.	 See id. at pg. 25. 

26.	 See id. at pg. 38-41. 

27.	 See id. at pg. 43-46. 

28.	 See id. at pg. 32-35. 

29.	 See id. at pg. 50-55. 

30.	 See id. at pg. 76-78. 

31.	 See id. at pg. 64. 

32.	 See Letter from Kenneth E. Bentsen, Jr., President 

& CEO, Securities Industry and Financial Markets 

Association, to Chairman Jay Clayton, SEC, and 

Robert Cook, President & CEO, FINRA (July 6, 

2018) (“SIFMA Letter”); Letter from Matt Berger, 

Global Head of Fixed Income and Commodities, 

Jane Street Capital, LLC, to Brent J. Fields, Federal 

Advisory Committee Management Officer and 

Secretary, SEC (May 16, 2018) (“Jane Street Letter”); 

Letter from Wouter Buitenhuis, Flow Traders U.S. 

LLC, to Federal Advisory Committee Management 

Officer and Secretary, SEC (July 5, 2018) (“Flow 

Traders Letter”); Letter from Gregory Davis, Chief 

Investment Officer, Vanguard, to Brent Fields, 

Secretary, SEC (January 2, 2019) (“Vanguard 

Letter”); Letter from Larry Harris, Fred V. Keenan 

Chair in Finance, USC Marshall School of Business, 

Kumar Venkataraman, James M. Collins Chair 

in Finance, Southern Methodist University, and 

Elisse Walter, Former Chairman, SEC, to Brent J. 

Fields, Federal Advisory Committee Management 

Officer and Secretary, SEC (August 21, 2018) 

(“Harris Letter”); Letter from Michael O’Brien, 

Head of Global Income Trading, Eaton Vance 

Management, to Brent J. Fields, Federal Advisory 

Committee Management Officer and Secretary, 

SEC, and Robert Cook, President & CEO, FINRA 

(September 24, 2018) (“Eaton Vance Letter”); 

Letter from Sandra E O’Connor, Chief Regulatory 

Affairs Officer, JPMorgan Chase & Co., to SEC and 

FINRA (June 29, 2018) (“JPMorgan Chase Letter”); 

Letter from Cathy Scott, Director, Fixed Income 

Forum on behalf of The Credit Roundtable, to Brent 

Fields, Secretary, SEC, and SEC Complaint Center 

(November 27, 2018) (“Credit Roundtable Letter”); 

and Letter from Jed Stevenson, Senior Managing 

Director, Wellington Management Company LLP, 

to Brent J. Fields, Federal Advisory Committee 

Management Officer and Secretary, SEC, and 

Robert Cook, President & CEO, FINRA (February 

4, 2019) (“Wellington Management Letter”). 

These comments were submitted to the FIMSAC 

comment file (File No. 265-30), available at www. 

sec.gov/comments/265-30/265-30.htm. 

36 Regulatory Notice
	 	 	 	

	 	 	 	 	 		 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	 	

	 	 	 	 		

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	

	 	 	 	

	 	

	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 		

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	 	

	 	 	

	 	 	 	 	 	 	

	 	

	 	

	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

33.	 See SIFMA Letter at 2. 

April 12, 2019 19-12

34.	 See JPMorgan Chase Letter at 3. Wellington 

Management offered a similar observation, stating 

that “[o]ur experience in trading both investment 

grade and high yield bonds suggests that the 

immediate [TRACE] dissemination could result in 

broker-dealers preferring smaller trade sizes.” See 

Wellington Management Letter at 1. 

35.	 See Eaton Vance Letter at 2. 

36.	 See Harris Letter at 2-3. 

37.	 See Harris Letter at 5. 

38.	 See JPMorgan Chase Letter at 3. 

39.	 See SIFMA Letter at 2. 

40.	 See Eaton Vance Letter at 2. Similarly, Wellington 

Management stated its expectation that the pilot 

“will allow for improved market liquidity, as brokerdealers will have 48 hours to find purchasers 

who are willing to purchase the subject securities 

at prices that are not artificially reduced by the 

expectation of an eager seller.” See Wellington 

Management Letter at 2. 

41.	 See Harris Letter at 4. 

42.	 See id. at 2. 

43.	 See Harris Letter at 3. 

44.	 See The Credit Roundtable Letter at 2. Although 

The Credit Roundtable opposed the 48-

hour dissemination delay proposed in the 

FIMSAC Recommendation, it supported the 

Recommendation’s proposal to increase the IG 

dissemination cap from $5 million to $10 million 

and the non-IG dissemination cap from $1 million 

to $5 million. See The Credit Roundtable Letter at 1. 

45.	 See Vanguard Letter at 2. 

46.	 See id. 

47.	 See Jane Street Letter at 2-3. 

48.	 Jane Street further stated that the information 

asymmetry that would be created by the FIMSAC 

Recommendation would make market participants 

less willing to provide liquidity on “all-to-all” 

trading platforms, stifling the growth of such 

trading platforms. See Jane Street Letter at 2. 

49.	 See Flow Traders Letter at 3-4. 

50.	 See Vanguard Letter at 2. 

51.	 See JPMorgan Chase Letter at 4-6. 

52.	 See Harris Letter at 4. 

53.	 See Vanguard Letter at 3. 

54.	 See Securities Exchange Act Release No. 84875 

(December 19, 2018), 84 FR 5202, 5215 (February 

20, 2019) (Transaction Fee Pilot Adopting Release). 

55.	 The manner in which bonds are stratified by 144A 

type in this proposed pilot is consistent with the 

peer reviewed academic literature (Bessembinder, 

Jacobsen, Maxwell and Venkataraman 2018). 

56.	 See April 9th FIMSAC Transcript at pg. 30-31 

(expressing concern about picking “winners and 

losers, both in terms of issuers, in terms bonds 

owned by asset managers, bonds owned by 

individuals and bonds owned on dealer balance 

sheets”). 

57.	 FINRA notes that the comparison between Test 

Group 1 and 3 involves two changes because the 

delayed dissemination in Test Group 3 would occur 

at a higher trade size threshold and Test Group 3 

includes an increase in the dissemination cap. An 

alternative construction considered for Test Group 

1 is discussed below. 

58.	 Liquidity is the degree to which an asset or security 

can be quickly bought or sold in the market without 

affecting the asset’s price. 

59.	 See Transaction Fee Pilot Adopting Release, 84 FR 

at 5244. 

60.	 See id. at 5259. 

61.	 See id. at 5266. 

62.	 Bessembinder, Maxwell and Venkataraman 

(2006), Edwards, Harris and Piwowar (2007) and 

Goldstein, Hotchkiss and Sirri (2007) found that 

TRACE reduced transaction costs for investors. 

The latter two papers also found the reduction 

in cost is greater for smaller size trades. Jacobsen 

and Venkataraman (2018) found reduced trading 

cost in 144A corporate bonds. On the other hand, 

Goldstein, Hotchkiss and Sirri (2007) found that the 

reduction in bid-ask spread was limited to certain 

type of bonds and less frequently traded bonds and 

very large trades showed no significant reduction in 

bid-ask spread. 

Regulatory Notice	 37
	 	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	 	 	

	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 		

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

	 	 	 	 	 	 	 	 	

	 	 	 	 	 	 	 	

	 	 	 	 	 	 	

63.	 See Goldstein and Hotchkiss (2007) and Asquith, 

Covert and Pathak (2013). 

19-12 April 12, 2019

©2019. FINRA. All rights reserved. Regulatory Notices attempt to present information to readers in a format that is 

easily understandable. However, please be aware that, in case of any misunderstanding, the rule language prevails. 

64.	 Goldstein, Hotchkiss and Sirri (2007) and Asquith, 

Covert and Pathak (2013) did not find that TRACE 

increased trading activity. Indeed, Asquith, Covert 

and Pathak (2013) found that TRACE reduced 

trading activity for high-yield (i.e., non-IG) bonds. 

Bessembinder and Maxwell (2008) offered a 

possible explanation of the reduced trading activity 

in the dealer market. The paper noted the dramatic 

increase in corporate bond trading volume on the 

electronic platform that followed the introduction 

of TRACE and that TRACE might have improved the 

viability of the electronic market. Bessembinder 

and Maxwell (2008) noted that while investors had 

benefited from the increased transparency through 

reduced trading cost, bond dealers had experienced 

reductions in employment and compensation. 

Market participants found it more difficult to trade 

large size orders as dealers were reluctant to carry 

inventory. 

65.	 Bessembinder, Maxwell and Venkataraman (2006) 

found the concentration ratio of trades completed 

by the largest 12 dealers decreased. Jacobsen 

and Venkataraman (2018) found small dealers 

gained market share and closed the trading cost 

advantage enjoyed by large dealers. Similar effects 

also have been observed in other markets. For 

example, Schultz and Song (2017) found trading 

costs fell for institutional investors and less active 

dealers received better prices in their trades with 

more active dealers in the To Be Announced 

mortgage-backed securities market. 

66.	 Cici, Gibson and Merrick (2011) found that TRACE 

contributed to the general decline in the valuation 

dispersion of bonds across mutual funds. 

67.	 For the purposes of the economic baseline, 

consistent with Rule 6710, IG includes bonds in the 

four highest generic rating categories (AAA, AA, A, 

BBB). Non-IG includes bonds rated in lower credit 

categories (BB, B, CCC, CC, C, C, NA/NR). 

68.	 The trend of block size trades are similar across 

issue sizes. Larger issue sizes attract more block 

trades. The graphs are available upon request. 

38 Regulatory Notice