What Is the Trade Reporting and Compliance Engine (TRACE)?
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What Is the Trade Reporting and Compliance Engine (TRACE)?

4 Min.

The Trade Reporting and Compliance Engine (TRACE) is a system managed by FINRA (formerly NASD) that enables the reporting of trades and data in the OTC bond market. It was introduced in 2002 to replace the FIPS reporting system. TRACE plays a vital role in enhancing transparency and fairness in the OTC markets, which are typically characterized by lower liquidity, less regulation, and greater opacity compared to exchange-based trading.

Basics

The Trade Reporting and Compliance Engine is a system developed by the National Association of Securities Dealers, now known as FINRA. It enables brokers who are FINRA members and deal with eligible fixed-income securities to report their over-the-counter (OTC) transactions. These transactions must be reported under the rules set by the Securities and Exchange Commission (SEC).

Goals of the TRACE Program

TRACE, operated by FINRA, is a program that promotes fairness in the market by providing real-time access to bond price information. It ensures equal access to reliable and timely trading data for corporate, agency, and structured product bonds. In 2002, TRACE was introduced to comply with SEC-approved rules that aimed to enhance price transparency in bond markets. It replaced the previous Fixed Income Pricing System (FIPS). Today, TRACE, operated by FINRA, offers comprehensive information on almost all OTC public and private fixed-income trading activities, including corporate bonds, agency debt, and securitized products such as asset-backed and mortgage-backed securities.

Market and Regulators in the TRACE Program

According to FINRA, TRACE's services contribute to the market's integrity. Investors can access real-time data to gain insights into the performance of their broker deals. Additionally, TRACE aids regulators in monitoring market activities, pricing, and execution quality.

TRACE offers different service tiers, both paid and free. Personal, noncommercial access is available at no cost for real-time transaction information displays. However, individual professionals and enterprises must pay for access to these displays. TRACE data can also be accessed through major market data vendors and select financial websites.

TRACE's Historical Data

TRACE offers a wide range of data services and feeds to meet diverse informational needs. In addition to real-time transaction data and monitoring capabilities, users benefit from various valuable resources. These include end-of-day transaction and activity reports, market activity and performance indicators, and enhanced historical data.

TRACE's enhanced historical data is particularly valuable. It provides users with detailed transaction-level information that was previously unavailable to the public. This includes important elements like transaction price, execution date and time, transaction size, and yield. By accessing this detailed information, investors and market participants can gain deeper insights into market trends, price dynamics, and trading patterns.

Moreover, TRACE's enhanced historical data goes beyond basic transaction details. It includes supplementary information such as buy/sell indicators and counterparty information. This additional data adds transparency and depth to the analysis, empowering users to make more informed investment decisions and conduct thorough assessments of their trading counterparts.

The availability of comprehensive historical data is a significant advancement as it enables investors to evaluate the past performance of securities more accurately. By examining transaction history and associated details, market participants can identify patterns, assess market liquidity, and make informed judgments about the overall health of the market.

TRACE's Market Reach

TRACE's market reach has expanded significantly over the years. Initially, it only covered corporate bonds and certain types of asset-backed securities. But in 2017, FINRA announced that it would expand the TRACE program to cover all US Treasury securities, including bills, notes, and bonds. This move was aimed at enhancing transparency in the Treasury market and increasing investor confidence in the government securities market. Today, TRACE offers comprehensive information on almost all OTC public and private fixed-income trading activities in the US, including government securities.

Conclusion

TRACE is a system managed by FINRA that enhances transparency and fairness in the OTC bond market. It provides real-time access to bond price information, ensuring equal access to reliable and timely trading data for corporate, agency, and structured product bonds. TRACE's historical data is particularly valuable, providing users with detailed transaction-level information that was previously unavailable to the public. The availability of comprehensive historical data empowers market participants to make more informed investment decisions and conduct thorough assessments of their trading counterparts.

Trade Reporting and Compliance Engine (TRACE)
Fixed Income Pricing System (FIPS)
Over-The-Counter (OTC)
Financial Industry Regulatory Authority (FINRA)
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