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We begin the week following the largest settlement ever in the fixed income space… following on the auction rate securities hoedown retail investors have to wonder what kind of liquidity and transparency their fixed income holdings have…

Imagine the inbound calls to brokers and financial advisors today… assurance is the catchword… it’s important to “truly represent” the pricing methods used and the relative liquidity of various products…

Beyond this enforcement coup retail investors have benefited from recent structural improvements in market  transparency for fixed income…

Market utilities such as TRACE, EMMA, and municipal pricing have opened significant new windows into this opaque market… much credit is due to regulators and market participants for these advancements…

But this is not enough… additional infrastructure must be developed which leverages the foundations of these existing utilities… important steps can be taken to safeguard investors and make fixed income markets comparable to equity markets for liquidity and transparency… it’s time for the three fold way…

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Retail Treasury Window 

Standardized nomenclature

Expanded pricing tape

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For markets to function efficiently they need a central reference point for pricing…

A pricing mechanism that is transparent and available to all…

An open pricing mechanism allows market participants to determine the value of securities and portfolios upon a common basis.

This gives members of the financial community an equal basis upon which to make trading and investing decisions.

The central reference point for fixed income market is the price or yield of the 10 year Treasury. 

Unfortunately, for individual investors, there is no central place to access current, transactable pricing for the Treasury benchmark.

The US Treasury does hold auctions for the primary issuance of securities… but this is infrequent and issues of different maturities become available at varied times. This is relatively inconvenient for retail investors who are able to purchase equities, mutual funds, options, ETFs and other securities on a regular and instantaneous basis.

If retail investors want to purchase Treasury securities it is an expensive, difficult process and they must access the over-the-counter market…

Investors must call several brokers and likely would receive quotes that varied over 30 basis points or more…

The right of US retail investors to buy the debt of their government on fair and accessible terms seems fundamental.

The federal government should encourage the purchase of Treasury securities as a vital form of savings for households.

Further this practice would develop and enhance the interest of our citizens in the nation’s shared patrimony.

To address this need for retail investors one might propose an industry consortium of broker dealers… but no… I think we have a better solution at hand… one that will help stabilize and make the retail fixed income markets transparent… a solution that will help investors save for retirement and other needs… a solution that puts the government at the service of the citizens… we need a…

~~~~  Treasury Retail Window  ~~~~

We propose an expansion of the Treasury Direct system for retail investors…

This expansion would utilize a transparent exchange system to benefit all market participants.

We propose:

1. Treasury Direct (TD) would serve as the conduit for primary and secondary sales of Treasury securities to retail investors.
2. Treasury Direct (TD) should be linked to the New York Federal Reserve’s System Open Market Account (SOMA) function for access to a secondary source of Treasuries to make available to retail investors.
3. TD would partner with a market utility to conduct daily auctions of primary and secondary offerings for retail investors.
4. For example, the Treasury could utilize the New York Stock Exchange Bonds (NYSEB) platform for these daily auctions.
5. If SOMA owned oddlot amounts of Treasury securities they could at their discretion make those oddlot amounts available in the auction process at the NYSEB.
6. The NYSEB conducts two daily bond auctions – an Opening Bond Auction at 4:00 a.m. ET and a Core Bond Auction at 9:30 a.m. ET. Orders not executed in either auction become eligible for continuous trading immediately after the auction.
7. The NYSEB would be responsible to provide regular and continuous last sale pricing for Treasury securities traded on the exchange to the investment community for no consideration.
8. Orders for Treasury securities placed at the NYSEB can not exceed $ 100,000. This would ensure that this facility is dedicated to the service of retail investors and does not compete with the NYFRB’s primary dealers within the institutional markets.
9. For efficiency and compliance purposes all transactions executed at the NYSEB must be  communicated via an industry standard protocol such as FIX.

This is a preliminary proposal… we will seek feedback and information from market participants, legislators, regulators and academics… we welcome suggestions and observations.

Stay tuned for other parts of the Three Fold Way…

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Further…

Standardized nomenclature

Expanded pricing tape

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