To improve transparency in the world's largest bond market, the chairman of the Securities and Exchange Commission (SEC) has asked staff for new rules to ensure principal trading firms (PTFs) are properly registered as dealers.
Gary Gensler, speaking at the New York Federal Reserve, stated that the rules would almost certainly require PTFs, also known as high-frequency trading firms, to report their trades to FINRA's Trade Reporting and Compliance Engine (TRACE).
According to Gensler, the SEC, as the market's regulator in the United States, should require such trading firms to follow capital and record-keeping rules and be subject to periodic examinations, similar to the equities and corporate bond markets.
Regulators have long argued that high-frequency trading, a computerized strategy that can move billions of dollars in fractions of a second, poses risks in the US government bond market, endangering the market's ability to function as well as investors' ability to fairly value assets.
Critics argue that high-frequency trading can cause excessive price swings in the bond market, which has seen a decline in liquidity.
"It's time for us to close the regulatory gap and ensure we have regulatory oversight over PTFs and others engaged in the regular business of buying and selling in this market," Gensler said.
Agency rules would also consider "whether all members of any registered clearing agency in this market should be required to bring in both sides of all of their trades - cash and repurchase agreement; how we might enhance or strengthen the Commission's Covered Clearing Agency Rules; and whether we can enable broader access to clearing, possibly including through responsible use of sponsored and correspondence clearing."