by Paul Schultz, Professor, Mendoza College of Business, University of Notre Dame.


The Dodd-Frank act requires a num­ber of changes in the way that swap contracts are cleared and traded. Among these changes is the manda­tory real-time reporting of trades. Proponents of mandatory trade reporting suggest that the increased transparency will lower trading costs and prevent unsophisticated inves­tors from being exploited by better-informed dealers. Others point to possible dangers in mandatory trade reporting. If a dealer reports a large transaction, others will be able to infer the dealer’s position and trade ahead of him or take advantage of his need to unwind the position in other ways. The Dodd-Frank act is not, however, the first instance of regula­tors imposing mandatory real-time trade reporting on a U.S. market. These past experiences may tell us something about what to expect from the mandated real-time reporting of swaps trades.
Corporate bonds, like swaps, trade over-the-counter. On July 1, 2002, at the SEC’s direction, the National Association of Securities Dealers (NASD) began requiring all of its members to report corporate bond trades to its TRACE system. The public dissemination of trade information was initially limited to investment grade bonds with issue sizes of $1 billion or more. The bonds for which public dissemination of trade information was required ex­panded in 2005, and, starting in Janu­ary 2006, trades of all bonds were disseminated to the public. Initially, dealers had 75 minutes to report trades. This declined to 45 minutes in October 2003, and 30 minutes in Oc­tober 2004. Since July 2005, dealers have been required to report trades within 15 minutes.
In the beginning, execution quality statistics were used to attract retail order flow. In the late eighties and early nineties, brokers who either sold or internalized their retail orders argued they were obtaining best execution for customer orders since they were executed at the best prevailing quote. These claims frustrated officials at the NYSE, since retail orders executed by the NYSE often received prices that were better than the best quoted prices. To reverse the loss of retail orders to markets internalizing or purchasing orders, in November of 1995 the NYSE began a pilot program named “ML/NYSE PRIME.” In this program, the NYSE began informing Merrill Lynch’s retail investors as to the savings they received because of “price improvement”—the execution of market orders at a price better than the best current bid or offer for that stock.
A number of academic studies have shown that trading costs for corporate bonds declined with the public dissemination of trade infor­mation. Bessembinder, Maxwell and Venkataraman (2006) estimate that TRACE led to a decline in trading costs for institutional investors of 7.9 basis points, or 58 percent. Edwards, Harris and Piwowar (2007) find that trading costs decline for all trade sizes with the introduction of trade reporting and dissemination, but that the decline in trading costs is “gener­ally greater for smaller trades.” Gold­stein, Hotchkiss, and Sirri (2007) found that trading costs declined the most for intermediate-sized trades of 21 to 250 bonds.
So, there is a strong consensus among economists that mandatory trade reporting reduced trading costs in the corporate bond market. There are some indications though, of unin­tended consequences. Bessembinder and Maxwell (2008) observe that following mandatory trade reporting, dealers became less willing to hold inventory and switched to being pri­marily brokers. There is also evidence that the initiation of TRACE report­ing was accompanied by a shift from publicly traded to privately placed corporate bonds.
Regulators have recently im­posed a similar change in post-trade transparency in the municipal bond market. Municipal bonds, like swaps and corporate bonds, trade over-the-counter. Traditionally, there has been no public dissemina­tion of trade prices in this market. Starting in 1999, the Municipal Securities Rulemaking Board (MSRB) began to require reporting of both dealer trades with customers and interdealer trades. Trade informa­tion was required to be disseminated to the public the next day for bonds that traded four or more times. In 2003, the four-trade threshold was abandoned and all trades began to be disseminated the next day. Starting on Jan. 31, 2005, “real-time” report­ing of municipal bonds was initiated. Trades were required to be reported within 15 minutes and trade informa­tion (price, number of bonds, and whether the trade was an interdealer trade, a dealer purchase, or a dealer sale) was immediately disseminated to the public.
In Schultz (2011), I examine the impact of real-time reporting on trades of newly offered municipal bonds. Unlike equities, new issues of municipal bonds are not required to be sold to all investors at the same price. Underwriters are required to sell a portion (10 percent) to the pub­lic at the stated public offering price, but can sell the rest at whatever price the market will bear.
I examine ratios of the price investors pay for bonds to the reof­fering price and the mean interdealer trade price in the 10 days following the offering. The increase in post-trade transparency has very little impact on either of these measures of the markups paid by investors. On the other hand, the standard deviation of prices investors pay to purchase bonds on the same day falls dramatically with real-time reporting. Investors are less likely to overpay for municipals, but they are also less likely to get great deals.
Swaps, like corporate and mu­nicipal bonds, trade over-the-counter. It is possible that requiring trade reporting will have many of the same effects on the swap market that it had on the bond markets. That is, trading costs could decline for swaps, and that could be less variation in prices. Experiences with the introduction of post-trade transparency in the bond markets suggest that small investors would be the biggest beneficiaries of increased transparency. The swap market is, however, almost entirely an institutional market. In the swap market, as with the bond markets, there is the possibility that real-time reporting of large trades may make it difficult for dealers to hedge or unwind positions without being front-run.
There is a critical difference between the imposition of real-time reporting in the swaps market, and the earlier impositions of real-time reporting in the corporate and mu­nicipal bond markets. In those cases, reporting requirements were gradu­ally strengthened over several years. Dodd-Frank requires creating a new trade reporting system from scratch. It may make sense to phase it in, with reporting requirements introduced for more swaps over time, and for al­lowable reporting delays to be gradu­ally diminished. That would make it possible to more accurately weigh the costs and benefits of real-time report­ing for swaps.
Paul Schultz is the John and Maude Clarke Professor of Finance at the University of Notre Dame. He can be reached at


1. Bessembinder, Hendrik, and William Maxwell, 2008, Markets: Transparency and the corporate bond market, Journal of Economic Perspectives 22, 217-234.
2. Bessembinder, Hendrik, William Maxwell, and Ku­mar Venkataraman, 2006,Market transparency, liquidity externalities, and institutional trading costs in corporate bonds, Journal of Financial Economics 82, 251-288.
3. Edwards, Amy, Lawrence Harris, and Michael Piwowar, 2007, Corporate bond market transpar­ency and transaction costs, Journal of Finance 62, 1421-1451.
4. Goldstein, Michael, Edith Hotchkiss, and Eric Sirri, 2007, Transparency and liquidity: A con­trolled experiment in corporate bonds, Review of Financial Studies 20, 235-273.
5. Schultz, Paul, 2011, The market for new issues of municipal bonds: The roles of transparency and limited access to retail investors, Working paper, University of Notre Dame.