Goodbye to Bond-Trading on the Telephone

Matt Levine January 14, 2018

The Securities and Exchange Commission has for a long time devoted a lot of attention to equity market structure: There are rules about how exchanges operate, and an Equity Market Structure Advisory Committee, and lots of attention paid to the perceived evils of high-frequency trading and dark pools and whatever. Bonds, meanwhile, were bonds. You just called up a bank and asked to buy some. The "market structure" in corporate bonds was the telephone. Of course there was a market structure, but it was tacit and sociological, made up of customs and relationships rather than rulebooks and exchanges. It wasn't as legible as equity market structure, so no one paid attention to it. Former SEC Commissioner Dan Gallagher liked to remark that the SEC had over 100 employees devoted to the equity markets, and just 0.5 employees -- half of one person's time -- focused on corporate bonds.

But that is changing. For one thing, bond market structure is getting more legible: As electronic trading platforms proliferate and replace dealers' telephones, there is just more structure to talk about. ("Our goal by the end of the year is that every trade we do is going to be done electronically," says the head of credit trading at Vanguard Group Inc.) Also, though, people worry more about bond market structure than they used to. They worry more that the old unwritten customs of the bond market, which governed how dealers interacted with customers, were the wrong customs and need to be changed. And of course they worry about bond market liquidity: If it is too hard to buy and sell bonds, and if that difficulty might somehow lead to a market crash or even a systemic crisis, then probably someone should be thinking about it.

So Thursday the SEC held the first meeting of its Fixed Income Market Structure Advisory Committee, which will bring together a bunch of bond-market types to help it figure out what to do about bonds. "While the media may have moved on to other topics," said Commissioner Michael Piwowar in his opening remarks, "it was not long ago that bond market liquidity (and most especially, the lack thereof) was the subject generating the most intense debate and concern in the financial markets." I like to think that was a reference to Money Stuff, which did keep up a "People are worried about bond market liquidity" section for at least a year, but which has now gotten bored and moved on. (I like to think this in part Piwowar cites me in a footnote.) But, fair enough: I will continue to talk about how people are worried about bond market liquidity here, as long as the people who are worrying about bond market liquidity specifically cite my "People are worried about bond market liquidity" in their worrying. As long as it is self-referential I can stay interested.

Meanwhile the SEC just disbanded the Equity Market Structure Advisory Committee yesterday?

The regulator on Wednesday emailed members of the Equity Market Structure Advisory Committee, informing them it was being dissolved, according to two people familiar with the matter. The group, created in 2015, was authorized through Tuesday. Ryan White, a spokesman for the SEC, declined to comment.

The group tried to tackle some of the market’s biggest controversies, including how to prevent a repeat of the haywire session in August 2015 that saw exchange-traded funds untether from their underlying holdings. But the SEC has yet to act on suggestions.

Maybe in a few years SEC commissioners will be complaining that the agency spends all its time on bonds and doesn't even know what is going on in equities any more.