SEC PUSHING HARD ON BOND PRICES: INDUSTRY’S EFFORTS TO BETTER INFORM PUBLIC FALL SHORT, LEVITT SAYS

Members of the Bond Market Association are still smarting from a chastising they got late last month at their own annual convention from Arthur Levitt, chairman of the Securities and Exchange Commission. The trade group had unveiled an Internet system that shows prices for investment-grade corporate bonds, but Mr. Levitt said the industry hadn’t done enough.

“I was struck by how forceful he was, how aggressive his timetable is to bring transparency to the market,” says Jeffrey Maron, managing director of Garban Information Systems America in New York, which disseminates prices for securities sold by its London-based parent, Garban PLC. At the conference, Garban introduced a trading system that includes high-yield corporates.

Mr. Levitt foresees pressure of his own. Days before the association’s meeting, the House Commerce Committee approved a bill that would have the SEC issue rules guaranteeing that investors have better information about prices for the $2.4 trillion corporate bond market.

Mr. Levitt had already told the National Association of Securities Dealers to propose new rules and suggest electronic systems. It plans to release its suggestions this summer.

“The technology exists to gather transaction prices, distribute them, and interpret them in a timely, accurate and efficient manner,” Mr. Levitt told the bond group.

The chairman also called for creating a database of transactions and a surveillance program for the corporate debt market to better detect fraud, and he said that bond dealers should determine whether some transactions are appropriate for some institutional investors.

“The consequences of treating all institutional investors as though they were Fidelity can be devastating,” he said.

“Corporate bond trading is disgraceful,” says Lynn Hopewell, president of the Monitor Group Inc., a Fairfax, Va., advisory firm that has discretion over more than $140 million. “You don’t know anything about the spreads. It’s all obscured and hidden. There’s not the open information you have on stocks.”

For its Internet site, the New York-based Bond Market Association, which represents 158 bond trading companies, is getting its price information from brokers who wholesale bonds to other brokers. Such interdealer trades account for between 30% and 35% of the overall high-grade corporate bond market, which handles an estimated $10 billion on an average day, according to the bond association.

“This is our effort to try to begin to improve price transparency,” says Micah Green, executive vice president of the association. “Whether or not the legislation is needed is open to debate. Both the industry and regulations are moving forward.”

The problem is that the corporate bond market is the opposite of the equities markets, where participants who want to trade large blocks of securities can get worse prices because it is hard to line up buyers or sellers of large amounts. Bond trades being reported on these new systems would show large block trades, which command better prices than small trades, and the fear is that retail investors may try to insist on getting the same price as large institutions.

“It is not the liquid market like U.S. Treasuries or the futures market,” says Joseph Shea, senior managing director for taxable fixed income at Cantor Fitzgerald LP in New York and a member of an NASD committee working on a proposal to send to the SEC in June.

NASD officials could not be reached for comment.

“Getting a consensus on what this system should do is the most difficult aspect,” says Steve Williams, senior special adviser in the SEC’s Division of Market Regulation. “What the dealers are afraid of is it will increase their risk in holding inventory if the market knows what they’ve bought and what they paid for it right away.”

In any event, devising a system to display many corporate bond prices accurately will be difficult. The market is “just not structured the same way that the equity markets are,” says John Puchalla, economist at New York bond rater Moody’s Investors Service. Companies issue bonds in different coupons, or interest rates, and different maturities.

“What that essentially means is that it’s difficult to consolidate, even from the same issuer, a number of these differing securities.”