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NBER WORKING PAPER SERIES

THE EFFECTS OF MANDATORY TRANSPARENCY IN FINANCIAL MARKET DESIGN:


EVIDENCE FROM THE CORPORATE BOND MARKET
Paul Asquith
Thom Covert
Parag Pathak
Working Paper 19417
http://www.nber.org/papers/w19417
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
September 2013
We are grateIul to Edith Hotchkiss, Leonid Kogan, Deborah Lucas, Jun Pan, and Alp Simsek Ior
discussions, and Ola Persson and FINRA Ior conversations about the data. We also thank Daniel
Green and Ahmad Zia Wahdat Ior their research assistance. The views expressed herein are those
oI the authors and do not necessarily reIlect the views oI the National Bureau oI Economic Research.
NBER working papers are circulated Ior discussion and comment purposes. They have not been peer-
reviewed or been subject to the review by the NBER Board oI Directors that accompanies oIIicial
NBER publications.
2013 by Paul Asquith, Thom Covert, and Parag Pathak. All rights reserved. Short sections oI text,
not to exceed two paragraphs, may be quoted without explicit permission provided that Iull credit,
including notice, is given to the source.
The EIIects oI Mandatory Transparency in Financial Market Design: Evidence Irom the Corporate
Bond Market
Paul Asquith, Thom Covert, and Parag Pathak
NBER Working Paper No. 19417
September 2013
JEL No. D47,G14,G18,L51
ABSTRACT
Many Iinancial markets have recently become subject to new regulations requiring transparency. This
paper studies how mandatory transparency aIIects trading in the corporate bond market. In July 2002,
TRACE began requiring the public dissemination oI post-trade price and volume inIormation Ior corporate
bonds. Dissemination took place in Phases, with actively traded, investment grade bonds becoming
transparent beIore thinly traded, high-yield bonds. Using new data and a diIIerences-in-diIIerences
research design, we Iind that transparency causes a signiIicant decrease in price dispersion Ior all bonds
and a signiIicant decrease in trading activity Ior some categories oI bonds. The largest decrease in
daily price standard deviation, 24.7, and the largest decrease in trading activity, 41.3, occurs Ior
bonds in the Iinal Phase, which consisted primarily oI high-yield bonds. These results indicate that
mandated transparency may help some investors and dealers through a decline in price dispersion,
while harming others through a reduction in trading activity.
Paul Asquith
MIT Sloan School oI Management
100 Main Street, E62-660
Cambridge, MA 02142
and NBER
pasquithmit.edu
Thom Covert
Harvard Business School
Wyss Hall #102
Soldiers Field Rd.
Boston, MA 02163
tcoverthbs.edu
Parag Pathak
Department oI Economics, E17-240
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
and NBER
ppathakmit.edu
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I. Introduction
Tradinginmanyfinancialsecuritiestakesplaceinenvironmentswithagreatdealof
transparency.Forinstance,nearlyallU.S.stockstradeonexchangeswithrealtimereportingofpre
tradebidandaskquotesandposttradetransactionpricesandvolume.Ontheotherhand,some
securities,suchascreditdefaultswapsandcollateralizeddebtobligations,havehistoricallytradedover
thecounterwithoutevenposttradeinformationaboutprevioustransactions.Thispaperstudiesthe
effectsofadramaticincreaseintransparencyinthecorporatebondmarket.Wefindthattransparency
significantlyreducespricedispersionforallbondsandsignificantlyreducestradingactivityforsome
categoriesofbonds.
Corporatebondswerelargelyexchangetradedinthe1930s,whichmeantthatposttradeprices
andvolumewerepubliclyavailable(BiasandGreen2007).AfterWorldWarII,however,tradinginthis
marketmigratedtooverthecounter,withprivatebilateralnegotiationsandnopublicreportingof
transactiondetails.Ifinvestorswantedinformationonabondsmarketprice,theyhadalimitedsetof
options:theycouldcontactcorporatebonddealersandaskforquotesortheycouldconsultavendor
thatprovidesestimatedprices(widelyknownasmatrixprices).
ThecorporatebondmarketunderwentasignificantchangeinJuly2002wheninformationon
thepricesandvolumeofcompletedtransactionswereonceagainpubliclydisclosed.FINRA(thenthe
NASD)mandatedtransparencyinthecorporatebondmarketthroughtheTradeReportingand
ComplianceEngine(TRACE)program.FINRArequiredthatalltransactionsinU.S.corporatebondsby
regulatedmarketparticipantsbereportedonatimelybasistoTRACE.Corporatebondsareoneofthe
worldslargestoverthecountermarketswithaveragetransactionsof$4.2trillionayearoverthis
period(SIFMA2013).FINRAthenmadethisinformationtransparentbypubliclyreleasing(intheir
wordsdisseminating)thepricesandvolumecompletedbondtrades.Bondtradedisseminationwas
Phasedinonfourseparatedatesoverathreeandahalfyearperiod.Theincreaseininformation
availabletomarketparticipantswassosignificantthatithasbeencomparedtotheearly20
th
century
introductionofstockmarkettickersandelectronicscreensforTreasuries(Vames2003).
Studiesofchangesinmarketdesignforopaquemarketsareusuallylimitedbecause,although
datasometimesexistsafterthenewdesignisimplemented,thereisrarelycomprehensiveinformation
onmarketbehaviorbeforehand.Priorto2010,FINRAdidnotreleaseanyinformationregardinga
bondstradesuntilafterthedisseminationPhaseforthatbondbegan.In2010,however,FINRA
releasedtransactionsdataonallbonds,disseminatedandnotdisseminated,sincethestartofTRACE.
Withthisnewlyreleaseddataset,itnowpossibletoobservechangesinthetradingbehaviorof
corporatebondsusingdatafromperiodsbeforeandaftertheirtradesaredisseminated.Moreover,this
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comprehensiverecordoftransactionsmakesitispossibletoprovideadefinitiveaccountoftheeffectof
TRACEacrossallcategoriesofbonds.
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EvenbeforeFINRAreleasedthishistoricaltransactionleveldata,TRACEhadbecomeatemplate
forhowfinancialmarketreformandregulationshouldproceed.Difficultiesevaluatingthetradingand
valueofoverthecounterinstrumentsduringthe2008financialcrisismotivatedsometopropose
reformsinspiredbyTRACE.See,forexample,Acharya,Engle,etal.(2009)ortherecommendationsof
theSquamLakeGroup(Frenchet.al.,2010)whichstate:
RegulatorsshouldpromotegreatertransparencyintheCDSmarketforthemoreliquidand
standardizedindexandsinglenamecontracts.Considerationshouldbegiventotheintroduction
ofatradereportingsystemforthesecontractssimilartotheTRACEsystem.
Furthermore,TRACEwasexpandedinMarch2010toincludeAgencyBackedSecuritiesandinMay2011
toincludeAssetBackedSecurities.InApril2013,theFINRAboardapprovedaproposal,currently
awaitingSECapproval,topubliclydisseminate144Atransactions.Therearealsoongoingeffortsto
mimicTRACEforEuropeancorporatebonds(Learner2011).Finally,TitleVIIoftheDoddFrankWall
StreetReformandConsumerProtectionAct(DoddFrank)requiresthatswaps(includingcreditdefault
swaps,interestrateswaps,collateralizeddebtobligations,andotherderivatives)betradedandcleared
centrallyonexchanges.DoddFrankfollowsTRACEsdefinitionoftransparencybyrequiringpublic
disseminationofposttradetransactioninformationregardingpriceandvolume.
ProponentsofTRACEarguethattransparencymakesthecorporatebondmarketaccessibleto
retailclients,enhancesmarketintegrityandstability,andprovidesregulatorsgreaterabilitytomonitor
themarket.Theyreasonthatwiththeintroductionoftransparency,pricediscoveryandthebargaining
powerofpreviouslyuninformedparticipantsshouldimprove(NASD2005).Thisinturnshouldbe
reflectedinadecreaseinbondpricedispersionand,ifmorestablepricesattractadditionalparticipants,
anincreaseintradingactivity(Levitt1999).
OpponentsofTRACEobjecttomandatorytransparency,sayingthatisunnecessaryand
potentiallyharmful.Theyarguethattransparencywouldaddlittleornovaluetohighlyliquidand
investmentgradebondssincetheseissuesoftentradebasedonwidelyknownUSTreasurybenchmarks
(NASD2006).Theyfurtherarguethatifadditionalinformationabouttradeswasindeedvaluable,then
thirdpartyparticipantswouldalreadycollectandprovideit,aviewthatdatesbacktoStigler(1963).
Opponentsalsoforecastadverseconsequencesforinvestorssince,ifpricetransparencyreducesdealer
margins,dealerswouldbelesswillingtocommitcapitaltoholdcertainsecuritiesininventorymakingit
moredifficulttotradeinthesesecurities.TheBondMarketAssociationarguedthattheadverseeffects
oftransparencymaybeexacerbatedforlowerratedandlessfrequentlytradedbonds(Mullen2004).

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Becauseofdatalimitations,earlierstudiesofTRACEfocusedonpartofTRACEsimplementationand,therefore,
onparticularsubsetsofbonds.Forinstance,Bessembinder,Maxwell,andVenkataram(2006)primarilystudythe
effectofPhase1ofTRACEonusingdatafromtheNationalAssociationofInsuranceCommissioners.Edwards,
Harris,andPiwowar(2007)andHotchkiss,Goldstein,andSirri(2007)studytheeffectofPhase2ondifferent
samplesofbonds.
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Lastly,opponentssawTRACEasimposingheavycompliancecosts,particularlyforsmallfirmswhodo
notselfclear(Jamieson2006).Thus,opponentsarguethatmarkettransparencyreducesoveralltrading
activityandthedepthofthemarket.Notsurprisingly,similarargumentsforandagainsttransparency
haveresurfacedinresponsetotherecentintroductionoftheDoddFranksposttradetransparency
requirementsforswaps(Economist2011).
TheimplementationofTRACEandthereleaseofthenewdatabaseprovideaunique
opportunitytostudytheimpactsofmandatedtransparencyonmarketbehavior.TRACEsdissemination
ofpriceandvolumedatawasnotimplementedonallbondssimultaneously.InJuly2002,FINRAbegan
collectingpriceandvolumeinformationforallcorporatebondtrades.Onthesameday,FINRAbegan
disseminationofthisinformationforjustasubsetofbonds.TherewerethreeothermajorPhaseins,
Phase2,3A,and3B,expandingthesetofbondscovered.BondswereassignedtoPhasesusingbond
issuesize,creditquality,andpreviouslevelsoftradingactivity.ByFebruary2005,thepriceandvolume
ofeverycorporatebondtradewaspubliclydisseminatedshortlyafterthetradesexecution.Thus,
between2002and2005,corporatebondmarketparticipantswentfromhavinglittleknowledgeof
tradingactivitytohavingposttradeknowledgesimilartoequitymarketparticipants.
OurempiricalstrategyexploitsthesePhasestoconstructabeforeandaftercomparison
betweenbondssubjecttoachangeintransparencyandbondsthatarenot.Thisdifferenceindifference
researchdesigngivesusthechancetoavoidconfoundingtheeffectsoftransparencywithunobserved
shockstothecorporatebondmarket.AlthoughourapproachdoesnotcoverthefirstPhaseofTRACE
(wherethereisnoTRACEdatabeforehand),itcoverstheremainingPhases,whichrepresent98%of
bondsinthePhases.
Thenewdatabaseandourresearchdesignallowustoaskquestionspreviousresearcherswere
unabletoinvestigate.PreviousworkonTRACEfocusedonimputedtransactioncosts.Inthispaper,we
focusonTRACEsimpactonmarketbehavior,inparticularitseffectontradingactivityandprice
dispersion.EarlierworkalsofocusedonlyonPhase1and/orPhase2.Thispapercoverstheentire
TRACEimplementationperiod,whichisimportantbecausethetypesofbondscoveredbyTRACEinlater
PhasesdifferfromthatofearlierPhasesbydesign.Inparticular,bondscoveredinearlierPhaseshad
largeissuesizesandinvestmentgraderatings,whilebondscoveredinlaterPhasesofTRACEwerebonds
withsmallerissuesizesandlowercreditquality.Theselatterbondsareexactlytheonesthatopponents
ofTRACEwarnedwouldhavethemostadverseconsequences.
Wefindthatposttradetransparencyofpriceandvolumeleadstoasignificantreductionin
tradingactivityandpricedispersion.Usingourmainmeasureoftradingactivity,tradingvolume/issue
size,andourpreferreddifferencesindifferencesspecification,wefindasignificant15.2%reductionin
tradingactivityinthe90daysafterTRACEsintroductionforthepooledsampleacrossPhases2,3A,and
3B,i.e.,thePhaseswherewecanobservetradingbeforeandafterdissemination.Thisresultisdriven
primarilybyPhase3Bbonds,whichexperienceasignificant41.3%reductioninvolume/issuesize.Phase
3Bbondsarelargelybondswithcreditratingsbelowinvestmentgradethattradeinfrequently.Event
studiesshowthatthereductionintradingactivityforPhase3Bbondsoccursimmediatelyupon
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dissemination.Inaddition,theseresultsarerobusttoalternativedifferencesindifferences
specificationsthatvarytimetrendsandcontrolgroups.Thereductionintradingactivitycausedby
TRACEisalsoseenusingseveralothermeasuresoftradingactivitysuchasvolume,numberoftrades,
andaveragetradesize.
Transparencyalsocausesasignificantreductioninpricedispersion.Wefindasignificant8.5%
reductioninwithindaypricestandarddeviationinthe90daysafterTRACEsintroductionforthepooled
sample,andsignificantreductionsforPhases2,3A,and3Bwhenexaminedindividually.Thelargest
reductionisforPhase3Bbonds,whichisasignificant24.7%.ThereductionforPhases2and3Aarealso
bothsignificantat7.3%and6.5%,respectively.Eventstudiesshowthatpricedispersionfalls
immediatelyupondisseminationforallthreePhases.Inaddition,theseresultsarerobusttotrendsand
alternativeassumptionsaboutcontrolgroups.Thereductionisalsoevidentusingothermeasuresof
pricedispersionsuchasthedifferencebetweenthemaximumandminimumpriceonagivendayand
pricestandarddeviationmeasurescomputedoverlongertimewindows.
FINRAimplementedTRACEinPhasesbecauseofconcernsaboutthepossiblenegativeimpactof
transparencyonthinlytraded,smallissueandlowcreditratedbonds.Examiningissuesizeacrossall
Phases,wefindthattradingactivitydecreasesmoreforlargeissuesizebonds,butthatthereductionin
pricedispersionisuncorrelatedwithissuesize.Creditratings,however,matterforbothtradingactivity
andpricedispersion.Highyieldbondsexperiencealargeandsignificantreductionintradingactivity,
whiletheresultsaremixedforinvestmentgradebonds.Highyieldbondsalsoexperiencethelargest
decreaseinpricedispersion,butpricedispersionsignificantlyfallsacrossallcreditqualities.Therefore,
theintroductionoftransparencyinthecorporatebondmarkethasheterogeneouseffectsacrosssizes
andratingclasses.
Lastly,wereportonacomplementaryanalysisusingtransactionsdatafromtheNational
AssociationofInsuranceCommissioners(NAIC)inanattempttoinvestigatetheeffectofTRACEon
Phase1bonds.Thisanalysisisinconclusive.However,sinceNAICdatareportstheidentityofthe
securitydealerdoingeachtrade,weanalyzethatdataandshowthatTRACEcausesareductionindealer
volumeandnumberoftradesforthelargestdealersforallPhases.
Therestofthispaperisorganizedasfollows.Section2presentsadditionalbackgroundon
TRACEandreviewstherelatedliterature.Section3describesthehistoricalTRACEdatabaseand
presentsdescriptivestatistics.Section4describesourresearchdesignandthemainresults.Section5
examinestherobustnessofourfindingsandreportsonTRACEseffectonalternativemeasuresof
tradingactivityandpricedispersion.InSection6,wefurtherexploreheterogeneityinourfindings
basedonratingsandissuesize.Section7reportsonaninvestigationofcorporatebondtradingusing
theNAICdatabase.Thelastsectionstatesourconclusionsanddiscussestheimplicationsofour
findings.
II. TRACEandtheCorporateBondMarket
II.A HistoryandImplementationofTRACE
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TheTradeReportingandComplianceEngine(TRACE)waslaunchedinJuly2002,butithasits
originsinthelate1990swhentheSecuritiesandExchangeCommission(SEC)reviewedissuesrelatedto
pricetransparencyinU.S.debtmarkets.Afterthisreview,theSECaskedtheNationalAssociationof
SecurityDealers(NASD)totakethreestepstoenhancethetransparencyandtheintegrityofthe
corporatedebtmarket:1)adoptrulestoreportalltransactionsinU.S.corporatebondstoNASDand
developsystemstoreceiveanddistributetransactionpricesonanimmediatebasis;2)createadatabase
oftransactionsincorporatebondstoenableNASDandotherregulatorstotakeaproactiverolein
supervisingthecorporatedebtmarket;and3)createasurveillanceprogramtobetterdetect
misconductandfosterinvestorconfidenceinthecorporatedebtmarket.TheNASDchangeditsname
totheFinancialIndustryRegulatoryAgency(FINRA)in2007.
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ByJanuary2001,theSECapprovedrulesrequiringNASDmemberstoreportalloverthecounter
(OTC)markettransactionsineligiblefixedincomesecuritiestotheNASDandmandatingthatcertain
markettransactionsbedisseminated.NASDdevelopedaplatform,TRACE,tofacilitatethismandatory
reporting.Therules,referredtoasthe"TRACERules,"arecontainedinthenewRule6200Seriesthat
replacedtheoldRule6200Series,whichgovernedtheFixedIncomePricingSystem(FIPS).FIPSstarted
inApril1994withreportedtransactionsinformationonapproximately50highyieldbondsatanypoint
intime.
NASDsstatedrationalefortheintroductionofTRACEwastobringtransparencytothe
corporatebondmarket.Advocatesoftransparencyanticipatedthatalmosteveryonewouldbenefit
becauseofincreasedmarketparticipation.Forinstance,SECcommissionerArthurLevitt(1999)
remarked,Thisparticipationmeansmoretrading,moremarketliquidity,andperhapsevennew
businessforbonddealers.DougShulman,NASDsPresidentofMarkets,ServicesandInformation
statedasmuch(NASD2005):Bydisseminatingaccurateandtimelytradinginformation,TRACE
enhancestheintegrityofthecorporatebondmarketandcreatesalevelplayingfieldforallinvestors.
The2005TRACEFactBookadds(p.2):Fromaregulatorystandpoint,suchlevelsoftransparency
betterenableregulatorstomonitorthemarket,pricingandexecutionquality.

Criticswereconcernedabouthowdisclosurewouldimpacttheincentivesofdealersandtraders
(seee.g.,Bravo2003,Decker2007)andinturntheoperationofthecorporatebondmarket.TheBond
MarketAssociationwarnedofseriousconcernsaboutthepotentialharmtoliquidityresultingfrom
rapidtransactiondataonlowerrated,lessfrequentlytradedissues(Mullen2004).Inparticular,there
wasaconcernthatdealersmaybelesslikelytocommitcapitaltoholdinventoryinilliquidsecurities
wheninformationabouttheirtransactionswasmadepublic.Ifbidaskspreadssubsidizedealers
inventoryholdingcostsandifTRACEreducesthesespreads,itmaybecometoocostlyfordealerstohold
somelessactivelytradedsecurities.

4
http://www.finra.org/Industry/Compliance/MarketTransparency/TRACE/FAQ/P085430,Lastaccessed:July14,
2012.
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Anotherconcernwasthatmakingtradespublic,particularlylargetrades,woulddisadvantage
dealers.Iflargedealersbuyinquantityandthenprovideliquiditytothemarket,havingthepriceand
quantitytheybuyatknownmaycaptheresalepricetheycancharge.Thus,asDuffie(2012)states,
censoringtradeinformationallowsdealerstohavethechancetoreduceinventoryimbalances
stemmingfromlargetradeswithlessconcernthatthesizeofatradeortheirreservationpricewillbe
usedtothebargainingadvantageoftheirnextcounterparties.Theseconcernsultimatelymotivated
theNASDtocensortradesizereportsat$1,000,000forhighyieldbondsand$5,000,000forinvestment
gradebonds(Vames2003).
OnJuly1,2002,FINRAimplementedTRACE,requiringdealerstoreportallbondtransactionson
TRACEeligiblesecuritieswithin75minutes.AsdescribedinTable1,FINRAbegandisseminatingprice
andvolumedatafortradesinselectedinvestmentgradebondswithinitialissueof$1billionorgreater
(i.e.,Phase1bonds).FINRAsdisseminationoccurredimmediatelyuponreportingforthesebonds.A
TRACEeligiblesecurityisanyUSdollardenominateddebtsecuritythatisdepositoryeligibleand
registeredbytheSEC,orissuedpursuanttoSection4(2)oftheSecuritiesActof1933andpurchasedor
soldpursuanttoRule144a.
5
Additionally,the50highyieldsecuritiesdisseminatedunderFIPSwere
transferredtoTRACE,whichnowdisseminatedtheirtrades.
6
WedenotethesebondstheFINRA50.
About520securitieshadtheirinformationdisseminatedbytheendof2002.
AtthestartofPhase1,itwasnotcertainwhenandtowhatextentTRACEwouldbeexpanded.
Afterall,theFIPSprogramhadexistedwithoutexpansionforeightyears.Initially,abondtransactions
reportingcommitteecomprisedofNASDandtheBondMarketAssociationmemberswasestablishedto
studyTRACEsimpact.Theirmandatewastofocusnotonthelargest,highestqualitycreditandactively
tradedissues,butratherontherestofthemarket(Vames2003).Theirrecommendationwastoexpand
TRACEscoverage.TheNASDapprovedtheexpansionofTRACEonNovember21,2002andbytheSEC
onFebruary28,2003.

Phase2ofTRACEwasimplementedonMarch3,2003,anditexpandeddisseminationtoinclude
smallerinvestmentgradeissues.Thenewdisseminationrequirementsincludedsecuritieswithatleast
$100millionparvalueorgreaterandratingsofAorhigher.Inaddition,disseminationbeganonApril
14,2003foragroupof120InvestmentGradesecuritiesratedBBB.WedenotetheseBBBbondsasthe
FINRA120.
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AfterPhase2wasimplemented,thenumberofdisseminatedbondsincreasedto
approximately4,650bonds.Meanwhile,theFINRA50subsetdidnotremainconstantoverourtime

5
Thelistofeligiblesecuritytypesis:(1)Investmentgradedebt,includingRule144A/DTCCeligiblesecurities,(2)
HighyieldandunrateddebtofU.S.companiesandforeignprivatecompanies,(3)Mediumtermnotes,(4)
Convertibledebtandotherequitylinkedcorporatedebtnotlistedonanationalsecuritiesexchange,(5)Capital
trustsecurities,(6)Equipmenttrustsecurities,(7)Floatingratenotes,(8)GlobalbondsissuedbyU.S.companies
andforeignprivatecompanies,and(9)Risklinkeddebtsecurities(e.g.,catastrophebonds).TRACEeligible
securitiesexcludedebtthatisnotdepositoryeligible,sovereigndebt,developmentbankdebt,mortgageand
assetbackedsecurities,collateralizedmortgageobligations,andmoneymarketinstruments.
6
Alexander,Edwards,andFerri(2000)examinetheliquidityofthebondsintheFIPSdataset.
7
TheFINRA120samplewasselectedbyFINRAtostudytheimpactofdisseminationonmarketbehaviorandhas
beenstudiedbyGoldstein,Hotchkiss,andSirri(2007).
9

period.OnJuly13,2003,theFINRA50listwasupdated,andthelistwasthenupdatedquarterlyforthe
next5quarters.
8

Finally,onApril22,2004,afterTRACEhadbeenineffectforsomebondsforalmosttwoyears,
theNASDapprovedtheexpansionofTRACEtoalmostallbonds.ThelastPhasecameintwoparts,
whichFINRAdesignatesasPhase3AandPhase3B.ThedistinctionbetweenPhase3Aand3Bisthat
Phase3Bbondsareeligiblefordelayeddissemination.Disseminationisdelayedifatransactionisover
$1millionandoccursinabondthattradesinfrequentlyandisratedBBorbelow.Inaddition,
disseminationisdelayedfortradesimmediatelyfollowingtheofferingofTRACEeligiblesecuritiesrated
BBBorbelow.InPhase3A,effectiveonOctober1,2004,9,558newbondsstartedhavingtheir
informationabouttradesdisseminated.InPhase3B,effectiveonFebruary7,2005,anadditional3,016
bondsstarteddissemination,thoughsometimeswithdelay.
9
AccordingtotheNASDatthatpoint,there
wasrealtimedisseminationoftransactionandpricedatafor99percentofcorporatebondtrades
(NASD2005).

Inaneffortparalleltoincreasingthenumberofbondswithdisseminatedtradeinformation,
FINRAreducedthetimedelayforreportingatransactionfrom75minutesonJuly1,2002,to45minutes
onOctober1,2003,to30minutesonOctober1,2004,andto15minutesonJuly1,2005.OnJanuary9,
2006,thetimedelayfordisseminationwaseliminated.Sincemostbondtradesinfrequently,our
tradinganalysisusesonedayasthebasicunitoftime.Inoursampletheaveragenumberoftradesper
dayforabondis0.68.Therefore,wedonotfocusonchangesintimetodissemination,butinsteadon
newdissemination.

II.B RelatedLiterature
TherearethreemainstudiesofTRACE,eachofwhichfocusesoneitherPhase1orPhase2.
Bessembinder,Maxwell,andVenkataram(2006)study439bondsinPhase1usingtransactiondatafrom
theNationalAssociationofInsuranceCommissioners.Theyformulateandestimateastructuralmodel
oftransactioncostsandreporta4.97.9basispointreductionintransactioncostsforPhase1bondsina
beforeandaftercomparison.TheyalsofindthatafterPhase1,thereisadeclineintheconcentration
ratioforthe12largestdealers.
TwootherstudiesexaminetransactioncostsforPhase2bonds.Usingathenproprietary
databaseofallbondtrades(whichisnowpubliclyavailable),Edwards,Harris,andPiwowar(2007)also

8
TheFINRA50listwasupdatedonJuly13,2003,October15,2003,January15,2004,April14,2004,andJuly14,
2004.
9
Rule6250(b)(2)(A)states:Transactionsthataregreaterthan$1million(parvalue)inBBratedTRACEeligible
securitiesthattradeanaverageoflessthanonetimeperdaywillbedisseminatedtwobusinessdaysfromthe
timeofexecution.Rule6250(b)(2)(B)states:Transactionsthataregreaterthan$1million(parvalue)inTRACE
eligiblesecuritiesratedBorlowerthattradeanaverageoflessthanonetimeperdaywillbedisseminatedfour
businessdaysfromthetimeofexecution.OnJanuary9,2006,thisexceptionchangedandtherewasimmediate
disseminationofalltrades.
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examineimputedtransactioncosts.Theyfindthattransparentbondshavelowertransactioncosts.
Sincethisresultmaybeduetobondcharacteristicsratherthantheeffectoftransparency,theyalso
reportonadifferenceindifferenceanalysis,whichcomparesthetransactionscostsofbondswhichare
newlydisseminatedtothreedistinctcontrolgroupsofbondsthatdonotchangedisseminationstatus.
Thetransactionscostsofnewlydisseminatedbondsdecreaserelativetoeachcontrolgroupacrossthe
entirerangeoftradesizes.
Hotchkiss,GoldsteinandSirri(2007)reportonacontrolledexperiment,commissionedbythe
NASD,of120BBBPhase2bonds,90ofwhichareactivelytradedand30ofwhicharerelativelyinactive.
ThroughcooperationwiththeNASD,theauthorsconstructamatchedsampleofthe90activelytraded
bondsbasedonindustry,averagetradesperday,bondage,andtimetomaturity.Whenthe90actively
tradedbondsweredisseminatedonApril14,2003,thematchedbondwasnot.Toincreasepower,they
alsocomparethedisseminatedsampletoalargerportfolioofnondisseminatedbonds.Forthe90
activelytradedbonds,theyfinddeclinesintransactioncostsforallbutthegroupwiththesmallesttrade
size.Thereisnoevidenceofareductionintransactioncostsforinactivelytradedbonds.Insubsequent
work,HotchkissandGoldstein(2012)studynewissuesofcorporatebonds,andfindaseculardeclinein
pricedispersionfromJuly2002throughFebruary2007fornewlyissuedbonds.
WhilethesestudiesprovideevidencethatTRACEreducestransactioncostsforPhase1and
Phase2bonds,thereislittleevidenceaboutTRACEseffectontradingactivity.Fortheirsampleof120
BBBbonds,Hotchkiss,Goldstein,andSirri(2007)reportthatTRACEdidnotcauseanincreaseindaily
tradingvolumeandthenumberoftransactionsperday.Despitethissmallsamplesizeandtimeperiod,
Duffie(2012)concludestheempiricalevidencedoesnotgenerallysupportpriorconcernsbydealers
thattheintroductionofTRACEwouldreducemarketliquidity.Others,includingtheSEC,sawthe
evidenceasinconclusive,statingthatconcernsaboutliquiditywerealsonotrejected.
10

TheabsenceofanytradingactivityresultsissurprisinginlightofthenegativereactiontoTRACE
frommanymarketparticipants.Forinstance,BessembinderandMaxwell(2008)reportthatthenear
universalperceptionamongbonddealersisthattradingbecamemoredifficultafterTRACE.(Seealso
Jamieson2006andDecker2007).BessembinderandMaxwell(2008)areskepticaloftheseclaimsgiven
thattherewasanupwardtrendinaggregatecorporatebondtradingfrom20022007.Thisincreasein
aggregatebondtradingdoesnotimplyTRACEincreasedtradingactivity,however,sincetherewasalso
anupwardtrendintheamountofcorporatedebtoutstandingduetonewissues.Whenweholdthe
numberofbondsconstantbyexaminingbondscoveredinTRACEsfourPhases,thereisastrong
downwardtrendinaveragedailyvolume(seeFigure1).Inaddition,webelieveanotherthereasonthat
previousworkdidnotdetectsignificantadverseeffectsontradingactivityisthatitdidnotexaminethe
laterPhasesofTRACE,wherethedeclineintradingactivityisstrongest.

10
TheSECsDirectorofMarketRegulationNazareth(2004)statedtheNASDcommissionedtwostudiestoaddress
thisissue[theimpactofTRACEonliquidity].Neitherstudyprovidedsignificantevidencethattransparencyharms
liquidity.However,neitherstudywasextensiveenoughtoaddressallconcernsraisedbydealersandothermarket
participants.Theindustrygroup,theBondMarketAssociation,describedthesestudiesaslargelyinconclusive
(Mullen2004).
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Alsorelevantisasetofstudiesonmunicipalbonds.Green,Hollifield,andSchurhoff(2007a)
findsignificantpricedispersioninnewissuesofmunicipalbonds,whichtheyattributetothe
decentralizedandopaquemarketdesign.Green,Hollified,andSchurhoff(2007b)analyzebrokerdealer
andcustomertrades,andreportthatdealersexercisesubstantialmarketpower.OnJanuary31,2005
theMunicipalSecuritiesRulemakingBoardstartedrequiringthatinformationabouttradesinmunicipal
bondsbereportedwithin15minutes,similartoTRACE.Schultz(2012)comparespricedispersionat
offeringdateformunicipalbondsbeforeandafterthischangeandfindsthatitfallssharply.Hedoes
not,however,studypostoffertradingactivity.
Thereisalsoempiricalresearchontheeffectsoftransparencyinsettingsotherthanthebond
market.Greenstone,Oyer,andVissingJorgensen(2006)studythemandatorydisclosurerequirements
ofthe1964SecuritiesActAmendment.TheserequirementsrequiredOTCfirmstoregisterwiththeSEC,
provideregularupdatesonfinancialpositions,issueproxystatements,andreportoninsiderholdings
andtrades.TheyfindthatthesenewlyregisteredOTCfirmsexperiencepositiveabnormalreturnspost
disclosure.Furtherafield,Jensen(2007)investigatestheimpactofincreasedinformationonprice
dispersionamongfishermeninsouthernIndia.Aftermobilephonesbecameavailable,hefindsasharp
reductioninpricedispersionandareductionofwasteduetoexcessfish.
Finally,thetheoreticalworkontheimpactofdisseminationhighlightsvariousmechanisms
throughwhichdisseminationcanimpacttradingbehavior.(SeeBiais,Glosten,andSpatt(2005)fora
reviewoftheliteratureontheimpactoftransparencyonfinancialmarkets).Madhavan(1995)
demonstratesthatdealersmayprefernottodisclosetradesbecausetheybenefitfromthereductionin
pricecompetition.PaganoandRoell(1996)arguethatwellinformeddealersmaybeabletoextract
rentsfromlesswellinformedcustomersinanopaquemarket,andthattransparencymayresultinmore
uninformedtradersenteringthemarket.BloomfieldandOHara(1999)showthattransparencycan
reducemarketmakersincentivestosupplyliquidity,ifthemarketmakerhasmoredifficultyunwinding
inventoryfollowinglargetrades.Ontheotherhand,Naik,Neuberger,andViswanathan(1999)show
howtransparencycanimprovedealersabilitytosharerisks,whichdecreasestheirinventorycostsand
thereforecustomerscostsoftrading.
III. DataandDescriptiveStatistics
III.A HistoricalTRACEdataandPhaseidentification
BeginninginJuly2002,TRACEpubliclyprovidedpriceandvolumedatafordisseminatedtrades
forPhase1bonds.
11
ThisandlaterpubliclydisseminatedtradedataconstitutesthePublicTRACE
databaseavailabletomarketparticipantsatthetime.Simultaneously,FINRAalsocollectednon
disseminatedtradedata.Thisnondisseminateddatarepresentsalltradesoncorporatebondsinthe
periodbeforepublicdissemination.InMarch2010,FINRAreleasedaHistoricalTRACEdataset,which

11
FINRAcensoredreportedtradingvolumeat$1millionforhighyieldbondsand$5millionforinvestmentgrade
bonds.Thatis,fortradesgreaterthanthisamount,theactualtradingvolumewasnotreportedandTRACEonly
reportedthatthetradesizeexceededthecap.
12

includesbothdisseminatedandnondisseminatedtransactionrecords,startingfromTRACEsinitiation
inJuly2002.WeusetheHistoricalTRACEdatabasetoexaminetheperiodfromJuly1,2002through
December31,2006.SincePhase3B,thelastmajorPhaseofTRACE,concludedinFebruary2005,our
timeperiodcoversallfourTRACEPhases.
TheinformationintheFINRAdatabases(bothPublicandHistorical)isselfreportedbybond
dealerswhoareFINRAmembers.DealersarerequiredtoreportthebondsCUSIP,thetradesexecution
timeanddate,thetransactionprice($100=par),andthevolumetraded(indollarsofpar).Inaddition,
dealersarerequiredtoindicatewhethertheywerethebuyerortheseller,andwhetherthe
counterpartytothetradewasadealeroracustomer.UnlikethePublicTRACEdatabase,theHistorical
TRACEdatabasedoesnotcensorvolumeat$1millionor$5million.Finally,dealersarerequiredto
correcterrorsinpreviouslyreportedtradeswithflagscorrespondingtotradecancels,modifies,or
reversals.
Thereareanumberofstepsrequiredtoprocessthisrawdataintotheanalysisdatasetthatwe
use.ThesestepsandtheirrationalearedescribedindetailintheDataAppendixandoutlinedinTable
A1.TwoofthemajorstepsaretoeliminateallbondsnotcontainedintheMergentFixedIncome
SecuritiesDatabase(FISD),andtodropallbondswithanequitylikecomponentsincepartialprice
informationmaybeavailablefromthestockmarket.Nextweeliminatesomeofthetradingrecordsfor
theremainingbonds.Therearethreemainreasons.First,therearerecordsfortradesthatdonot
actuallytakeplacesincetheyarecancelled,modified,orreversed.Second,therearerecords
correspondingtotradesthatarereportedmorethanonce.Third,therearerecordswithissues
concerningtheirprice,size,ortiming.TableA1enumeratesthenumberofbondsandtraderecords
affectedbyeachstep.
12
AfterapplyingthefiltersdescribedinTableA1,thereare21,149,525trades,
correspondingto30,643CUSIPs,remainingintheCleanedHistoricalTRACEdatabase.
PhaseIdentification
FINRAscriterionforabondsdisseminationPhaseispresentedinTable1.Themaincriteriaare
theinitialissuesizeandthecreditrating.FINRAdoesnotindicateabondsPhasedesignationineither
theHistoricalorPublicFINRAdataset.Asaresult,wecontactedFINRAandobtainedtheirlistingsofthe
bondsincludedatthestartofPhases2,3A,and3B.Weobtainedthelistofbondsthatareinthe
FINRA50orFINRA120directlyfromtheFINRAwebsite.
13

FINRAdidnotprovideusalistofbondsinPhase1.ToconstructthePhase1list,werequirea
bondtohaveaninitialissuesizeof$1billionormore,beinvestmentgrade(followingthecriteriaFINRA

12
WedonotexcludebondstradesthatoccurredontheNYSEsAutomatedBondSystem.Eventhoughtheytake
placeonanexchangeandthereforearetransparent,theyconstituteatinyfractionofthemarket.Forinstance,
Hotchkiss,Goldstein,andSirri(2007)statethat99.9%ofcorporatebondtradingin2004takesplaceoverthe
counter.
13
Thelistisavailableathttp://www.finra.org/Industry/Compliance/MarketTransparency/TRACE/
Announcements/P117685,lastaccessedJanuary28,2013.
13

usedasoutlinedinTable1),andhaveapubliclydisseminatedtradebeforethestartofPhase2.
14
Bonds
whicharesimultaneouslyclassifiedinaPhaseandineithertheFINRA50orFINRA120areexcludedfrom
ourPhaselists.TheDataAppendixandTableA2furtherdescribethestepsinvolvedinmatchingthe
PhaseliststotheCleanedHistoricalTRACEdatabase.
TableA2showsthataftercleaning,thereare343Phase1bonds,2,538Phase2bonds,11,087
Phase3Abonds,and2,853Phase3Bbonds.Wedesignatethese16,825bondsand14,210,328tradesas
theCleanedPhaseSample.TheremainingbondsintheCleanedHistoricalTRACEdatabasearenot
associatedwithanyPhase.7,669bondsarealwaysdisseminated(theywereissuedafterthebeginning
oftheirPhasesandalwaysdisseminated)and1,708bondsareneverdisseminated(theymaturedbefore
thestartofwhatwouldhavebeentheirPhase).Finally,671bondsarenotdisseminatedconsistent
withFINRAsguidelines.TheyeitherhavesomenondisseminatedtradesafterabondsPhasebeganor
somedisseminatedtradesbeforethePhasesstartdate.
AlthoughthenumberofbondsdisseminatedinPhase1andPhase2islowerthanthenumberin
Phases3Aand3B,bondsintheearlierPhasesaccountforalargernumberoftradesperbond.For
instance,bondsinPhase1areheavilytradedwithatotalof10,208tradesperbondoveroursample
period.Incontrast,bondsinPhase3Bhaveonly351tradesperbond.
III.B BondCharacteristics
Table2showsthedistributionofissuesize,creditrating,couponrate,andmaturityforour
sampleofbondsbyPhases.Asmentionedabove,whenassigningbondstoPhases,FINRAusesissue
sizeandratingascriteria.Table2showsthemeanbondissuesizedecreasesfromPhase1toPhase3A,
consistentwiththerulessetbyFINRAoutlinedinTable1.Phase1bondshavebyfarthelargestissue
sizewithameanof$1.466billionandPhase3Abondsarethesmallestwithmeanissuesizesof$82
million.Phase3Bbondshavealargermeanissuesizeof$181million.
Wealsoreportthequartilesoftheissuesizedistributionaswellasthe10
th
and90
th
percentiles.
ThesequantilesshowthatthereisoverlapinissuesizebetweenPhases2,3A,and3B.Forexample,
themedianofPhase3Bbondsequalsthe25
th
percentileofPhase2bondsandthe75
th
percentileof
Phase3Abondsisclosetothe25
th
percentileofPhase3Bbonds.Theseoverlappingintervalsallowus
tocomparebondswithsimilarissuesizesacrossPhases2,3A,and3B.
Dataoncreditratingscomesfromtwosources.WefirstuseratingsinformationfromS&P
RatingsXpressifitisavailable.Thiscovers74.5%ofbondsforthefourPhases.Ifratingsarenot
availableinS&PRatingsXpress,weuseratingsfromFISD.
15,16
FISDincludesratingsfromS&P,Moodys,
FitchandDuffandPhelps.ToassignaFISDrating,wefirstusetheS&Pvalueifitexists,otherwisethe

14
ThisapproachwillnotcapturebondsthatareclassifiedbyFINRAasPhase1,butdonottradebeforePhase2.
15
Akins(2012)statesthattheS&PRatingsXpressdatabaseismorecompletethanFISDsS&Pratingsdatabase.
16
FINRAdoesnotrelyexclusivelyonS&Pratings.Italsousesratingsfromothernationallyrecognizedstatistical
ratingorganizations.Ifabondisunratedorsplitrated,FINRAhasspecificrulesdeterminingthebondsratingfor
thepurposesofPhaseclassification.
14

Moodysvalue,otherwisetheFitchvalue,andotherwisetheDuffandPhelpsvalue.IfFISDdoesnot
havearatingfromanyofthefour,weclassifythebondasunrated.Usingbothsources,thereare
ratingsfor99.2%ofbonds,and127bondsareclassifiedasunrated.
Table2showsthedistributionofcreditratingsatthestartofeachPhase.Theaverageratingat
thebeginningofthePhaseissimilarbetweenPhases1,2,and3A.BondsinPhase3Bhavesignificantly
lowercreditratings.WhilethereisoverlapbetweentheratingsinPhases1,2,and3A,thereislittleor
nooverlapinratingsbetweenPhase3BandtheotherPhases.The10
th
percentileratinginPhase3Bisa
BB+,whilethe90
th
percentileratinginPhase1,2,and3AareBBB,A,andBBB,respectively.
Table2alsodescribesbondcharacteristicsnotusedbyFINRAwhenassigningPhases.For
example,mostbondshavefixedcouponrates.TheonlyPhasewithlessthan90%fixedcouponsis
Phase2andeventhesebondshavefixedcoupons84.9%ofthetime.Consistentwithratings,the
highestcouponratesareforPhase3B.Inaddition,Phase1bondshavethelowestmaturityatissue
withameanof8.98yearsandamedianof5.10years.AllthreeoftheotherPhaseshaveamean
maturitygreaterthan11.8yearsandamedianmaturitygreaterthan9.7years.
III.C MeasuringTradingActivityandPriceDispersion
TradingActivity
Wemeasuretradingactivityinseveralways.Ourfirstmeasureistradingvolume,whichwe
defineasthenumberofbondstradedtimestheirparvalue.Figure1plotsthedailytradingvolume
averagedbyweekforthebondsinPhases2,3A,and3BfromJuly2002throughDecember2006.
17
The
threeverticallinescorrespondtothestartingdateforeachofthethreePhases.
18
ForallthreePhases,
theaveragedailytradingvolumefellbyaboutahalfovertheentireperiodJuly2002toDecember2006.
WhilethisvolumedropmaybeduetoTRACE,wecannot,atthispoint,excludethepossibilitythatthere
isapreexistingdownwardtrendinvolumeindependentofTRACE.
Tofocusonchangesintheimmediatetimeperiodsurroundingdissemination,thefirstsection
ofTable3reportsthemeanandquartilesofdailyvolumefortheperiod90daysbeforeand90days
afterthebeginningofeachPhase.
19
Table3showsthemeantradingvolumeislowerinthe90day
periodafterthestartofeachPhasethaninthe90dayperiodbeforeeachPhase.ThedeclinesinPhases
2and3AarenotaslargeasthatforPhase3B,wheretheaverage90daytradingvolumefalls41.9%.For
Phase2and3A,thepercentagedeclinesare4.9%and5.5%,respectively.

17
Figure1doesnotincludetradingdaysthatSIFMArecommendsthatbonddealerstakeofforoperateforless
thanafullday.Additionally,Figure1doesnotincludethetwoweeksspanningChristmasandNewYearsDaydue
tosignificantlyreducedvolume.
18
BondsinPhase1arenotplottedinFigure1becauseofscaling.Phase1bondshaveanaveragedailyvolumeof
7,513,772forthesampleperiod.
19
Sincebondstradeinfrequently,weusea90daywindowtocapturechangesintradingbehavior.InTable4,we
alsolookat30and60daywindows.
15

Table3alsoshowshowskewedthedistributionoftradingvolumeisacrossoursample.The
meantradingvolumeinPhases3Aand3Bisroughly100timesgreaterthanthemediansintheperiod
beforedissemination.Inaddition,morethanhalfofthePhase3Bbondsdonottradeinthe90days
afterdissemination.Moreover,theaveragetradingvolumeforPhase1bondsismorethan50times
greaterthantheaveragetradingvolumeforPhase3Bbondsforthepost90dayperiod.Taken
together,thesefactssuggestsubstantialheterogeneityintradingvolumewithinandacrossourbond
samples.
ThesedifferencesintradingvolumeacrossPhasesmaybeduetodifferenceinbondissuesizes.
Alargerbondissuemaygeneratemoreaftermarkettradingsimplybecausetherearemorebondsto
trade.AsshowninTable2,themeanissuesizeofPhase1bondsisalmostsixtimesgreaterthanthose
inPhase2.Phase2bondsmeanissuesizeisthreetimesthoseofbondsinPhase3A.Comparing
medianissuesizesinTable2acrossPhasessometimesleadstoevenlargerdifferences.Forexample,
themedianissuesizeinPhase2is$200million,whilethemedianissuesizeinPhase3Ais$12million.
ToaddresstheissueofwhetherthedifferenceinvolumeacrossPhasesisdrivenbydifferences
inissuesize,wenextexaminevolumedividedbyissuesize.Figure2plotsvolumedividedbyissuesize
foreachofthefourPhases.Whilethetimeseriesofvolume/issuesizeinFigure2followsthetime
seriesforvolumeinFigure1,dividingvolumebyissuesizemakestheplotsoftradingactivityforPhases
2,3A,and3Bclosertooneanotherthanvolumealone.Inaddition,thesecondsectionofTable3,
whichreportsstatisticsonvolume/issuesizebyPhase,reinforcesthisconclusion.
20
Normalizingbyissue
sizereducestheskewnessincomparisonsbothwithinandacrossPhases.ComparingwithinPhases,the
meanofvolume/issuesizeinPhases3Aand3Bisfourand18timesthemedianrespectively.This
comparestoaratioofabout100forvolumeasdiscussedabove.ComparingacrossPhases,themeanof
volume/issuesizeinPhase1iseighttimesthatinPhase3Binthe90daysafterdissemination.This
comparesto50timeswhenusingvolume.Consequently,theremainderofthepaperreports
volume/issuesizeasourprimarymeasureoftradingactivity.Wealsoconducttheentireanalysisusing
volumealone,buttosavespaceweonlyreportthoseresultswhendiscussingalternativemeasuresof
tradinginTable6.
Table3alsoreportsawithinbondmetric,bycomputingthefractionofbondsforwhichtrading
volumeincreases,decreasesorremainsthesameinthe90daysbeforeandafterthePhaseinitiation
date.Sincethecomparisonisbeforevs.afterforagivenbond,thenumbersareidenticalwhetherusing
volumeorvolume/issuesize.Phase3Bbondsshowapronounceddeclineintradingactivityinthe
withinbondcomparisons.45.1%ofPhase3Bbondshavemoretradingvolumebeforedissemination,
while15.2%ofPhase3Bbondshavemoretradingvolumeafterwards.AlargepercentageofPhase3B
bonds,39.7%,donottradeinthe90daysbeforeorafterthebeginningofthePhase.Thewithinbond
resultsforPhase2bondsalsoshowadeclinebutnotasmuch,from51.4%to43.7%.Theresultsfor

20
Analternativenormalizationwouldbelogvolume.AsseeninTable3,thisisinfeasiblesincevolumeisequalto
zeroformanybondsinthe90dayssurroundingthePhasestarts.
16

Phase3Aaremixed.Thefractionofbondswithhighervolumepostdisseminationisslightlygreater
thanforbeforedissemination,however,themeanvolumedeclinesfromtheperiodbeforetoafter.
PriceDispersion
Wealsoexaminetheimpactoftransparencyonpricedispersion.Webeginbyfocusingonthe
dailypricestandarddeviation,definedforbondiondaytas

it
=(
j
(p
ijt
p
it
)
2
)

, (1)
wherep
ijt
isthepriceofbondifortradejondaytandp
it
istheaveragepriceofbondiondayt.We
focusonpricestandarddeviationbecauseitdoesnotdependonassumptionsabouttherelationship
betweentransactionpricesandorderflow.WeexamineothermeasuresofpricedispersioninSection
6.Allmeasuresofdailypricestandarddeviationareinunitsofdollars.
Tocomputeadailypricestandarddeviation,itisnecessarytoobserveatleasttwobondtrades
inaday.Giventhelackoftradinginmanybonds,weoftendonotobservetwotrades.
21
Further,to
measuretheeffectsofdisseminationonpricedispersion,werequirethatthereisatleastonedailyprice
standarddeviationobservationbothinthe90daysbeforeandinthe90daysafterthebondschangein
dissemination.Asaresult,thenumberofbondsusedinourpricestandarddeviationanalysisis
substantiallysmallerthanthenumberusedinthevolumeanalysis.ThiscanbeseeninTable3s
samplecountsforeachPhase.Forexample,only57.0%ofPhase3Aand40.0%ofPhase3Bbondsinthe
volumesamplearealsointhepricestandarddeviationsample.Althoughnotshown,thebondsfor
whichwecancomputepricestandarddeviationtendtohavealargersizeatissueandhigherratingthan
thevolumesample.
Thereisapotentialbiasinourpricestandarddeviationmeasuresincethesampleisdefined
basedontradingbehaviorbothbeforeandafterchangesindissemination.Ifdisseminationcausesan
increaseordecreaseinbondtrading,thismaychangethenumberofbondsforwhichwecancompute
pricestandarddeviation.Thus,ifthebondsthatwouldhavetradedwithoutdisseminationsubstantially
differfromthebondsthatdotradewithdissemination,thenitmaybedifficulttointerpretchangesin
pricestandarddeviation.
22
Thisappearstonottobeanissueforoursample.
23
Tofurtherinvestigate

21
Measuresoftransactioncostssuchasdirectroundtriporimputedtransactioncostsalsopresentdifficultiesfor
lessactivelytradedbondssincetheyrequireobservingmultipletradeswithinashorttimehorizon.Forinstance,
Edwards,Harris,andPiwowar(2007)smethodrequiresthatabondtradesatleastninetimes.
22
Thisproblemdoesnotaffectourvolumecalculationsbecausewhenabonddoesnottrade,itcountsashaving
zerotradingvolume.
23
TheprobabilitythatanyofthePhase2,3A,or3Bbondstradeatleasttwiceonadayinthe90daysbefore
disseminationis12.5%.TotestwhetherthisprobabilitychangesafterTRACE,weestimatetheeffectofTRACEon
theprobabilitythatabondtradestwiceormoreonagivenday.Theestimatescomefromadifferencein
differenceregressionsimilartothoseestimatedinTable6,wherethedependentvariableisanindicatorfor
whetherabondtradestwoormoretimesinaday.(Thenextsectionintroducesourdifferenceindifference
17

therobustnessofourpricestandarddeviationfindings,inSection6weconstructamatchedsampleof
bondsholdingconstanttheobservablecharacteristicsofbondsbeforeandafterdissemination.
Figure3plotsthedailypricestandarddeviationaveragedbyweekfromJuly2002through
December2006.
24
Justaswithtradingvolume,thereisareductioninpricestandarddeviationoverthe
entiretimeperiod.Infact,thepricestandarddeviationfallsbyoverahalffromJuly2002toDecember
2006.However,unliketradingvolume,thedeclineinpricestandarddeviationseemstoinitiateat
TRACEslaunch,andcontinuesthrough2005.AnotherpatterninFigure3isthatpricestandard
deviation,overtheentireperiod,isusuallyhighestforPhase3Abonds,andislowestforPhase1.
Furthermore,standarddeviationforPhase1bondsislowerthanforPhase2andPhase3Aintheearly
partofthesampleperiod,butconvergesbytheendofoursampleperiod.
Table3alsoreportsonpricestandarddeviationinthe90daywindowaroundwhenabond
changesitsdisseminationstatus.Thereisareductioninpricestandarddeviation,measuredindollars,
forbondsinallthreePhases.TheaveragePhase2bondspricestandarddeviationfallsfrom$0.83to
$0.76,a8.4%reduction,whilethemedianPhase2bondspricestandarddeviationfallsfrom$0.67to
$0.65.ThepercentageofbondswithhigherstandarddeviationbeforethestartofPhase2is56.6%.
ThedropinpricestandarddeviationisevengreaterforPhase3Aand3Bbonds.TheaveragePhase3A
bondspricestandarddeviationfallsby$0.10,whichisa13.1%decrease,whiletheaveragePhase3B
fallsby$0.20,whichisa30.8%decrease.Themedianbondspricestandarddeviationdropsby$0.08
and$0.10,respectively.Column(5)ofTable3showsthatthenumberofbondsforwhomtheprice
standarddeviationisgreaterbeforehandis59.6%and63.5%forPhases3Aand3B,respectively.
Thus,Figures1,2,and3andTable3showthatTRACEcoincideswithadecreaseintrading
volumeforPhase3Bbonds.Moreover,therearesharpreductionsinpricestandarddeviationineachof
thethreePhaseswithinashort90daywindowsurroundingdissemination.However,changesineither
volumeorpricestandarddeviationarecontemporaneouswithanoveralldownwardtrendintrading

methodology.)Thereisastatisticallysignificant0.37%reductionintheprobabilityoftradingfortreatedbonds
acrossallthreePhases.
Assumingthatthelikelihoodoftradingisindependentacrossdays,thisimpliesthatTRACEcausesanegligible
reductionintheprobabilitythatabondspricestandarddeviationcanbemeasuredacross90calendardays.The
estimatedprobabilitythatabondisnolongerinthepricestandarddeviationsampleduetoTRACEislessthan
0.01%.Thisiscalculatedasfollows:theprobabilitythatinanydayamongthe90calendardaysbeforethereareat
leasttwotradesonthesamedayandthatinanydayamongthe90calendardaysafterdisseminationthereat
leasttwotradesonthesamedayisequal(1(1Pr(atleasttwotradesonday))^64)*(1(1Pr(atleasttwotradeson
day))^64),where64istheaveragenumberoftradingdaysamong90calendardays.The0.37%reductioninthe
probabilityofatleasttwotradesonadayfromestimatedprobabilityofatleasttwotradesbeforeTRACEof12.5%
yieldsa0.01%reductionintheprobabilitythatabondwillbeinpricestandarddeviationsampleduetoTRACE.

24
FollowingFigure1,Figure2doesnotincludetradingdaysthatSIFMArecommendsthatbonddealerstakeoffor
operateforlessthanafulldayanddoesnotincludethetwoweeksspanningChristmasandNewYearsDay.
18

activityandinpricestandarddeviationduringoursampleperiod.Asaresult,wecannotimmediately
concludethatanychangesorlackofchangesaretheresultofTRACEalone.Ournexttaskistoadjust
formarkettrends.
IV. ResearchDesignandMainResults
IV.A DifferencesinDifferencesFramework
AlthoughthebeforeandaftercomparisonsinTable3showthatpricestandarddeviationfalls
forbondsinallPhasesandtradingvolumedeclinesforPhase3Bbonds,abeforeandaftercomparison
isnotsufficienttoattributethechangestodisseminationalone.Weadjustformarkettrendsby
comparingthechangesinthetreatedsampletothoseinacontrolgroupbyestimatingdifferencesin
differencesmodelsoftheform:
y
it
=o+
0
Disseminate
i
+
1
Post
t
+Disseminate
i
xPost
t
+c
it,
(2)
wherey
it
isbondisoutcome(i.e.,measuresoftradingactivityorpricedispersion)ondayt,Disseminate
i

isanindicatorforwhetherthebondchangesdisseminationstatus(i.e.,isinthetreatedgroup)andPost
t

isanindicatorforthetradeoutcomesondaysafterthedisseminationperiod.Sincetherearerepeated
observationsperbond,inallestimates,thestandarderrorsareclusteredbybond.
Inequation(2),anypreexistingdifferencebetweenbondsthatchangedisseminationstatusand
thosethatdonotarecapturedby
0
.Anyeffectsofdisseminationthataccruetoallbondsthatis,
effectsthatarenotlimitedtoonlybondsthatchangetheirdisseminationstatusinthePhaseare
absorbedbytimeeffects
1
.Thecoefficientofinterestis,whichestimatesthedirecteffectof
transparencyonabondstradingoutcome.Thecoefficient reflectsthechangeintradingoutcomes
forbondsthatchangedisseminationstatuscomparedtothechangeintradingoutcomesforbondsthat
donotchangedisseminationstatus.Estimatesof, therefore,netoutaggregatechangesinbond
tradingoutcomes.
Itispossiblethatchangesindisseminationwillalsoaffectbondsthatdonotchange
disseminationifthemarketimpoundsthatinformationintoalltradingactivity.Indeed,theoverall
downwardtrendintradingactivityandpricestandarddeviationinFigures1and2maybethe
consequenceofTRACEsintroductioninJuly2002.However,wecannotassertthatTRACEcausedthis
decreasebecausewedonotobservetradingactivitybeforePhase1.Theoveralldownwardtrendcould
insteadbeduetomacroeconomicfactorsaffectingthecorporatebondmarket.Forexample,the
FederalReserveBankraisedinterestrates17timesfromJune2004throughJune2006(NASD2006).In
ourregressionequation,thetimeeffectsincorporateallofthesepotentialfactors,andthereforewe
cannotinterprettheestimatesof
1
asacausaleffectofdissemination.
Fortoprovideunbiasedestimatesofthecausaleffectoftransparencythereareseveral
importantnecessaryassumptions.First,transparencyanditsconsequencesmustnothavebeenfully
anticipatedbymarketparticipants;tothedegreethatimpactswereforeseenbytradersanddealers,the
19

impactsontradingactivityandpricedispersionwouldappearbeforetheactualchangeindissemination
status.IfalltradeoutcomesrespondedimmediatelyatPhase1,ourTRACEresultsforPhases2,3A,and
3BwouldonlymeasuretheincrementalimpactoflaterPhasesofTRACE.Bessembinder,Maxwell,and
Venkataraman(2006)firstemphasizedthispointwhentheyarguedthatTRACEsinitiationaffectedall
bonds,notonlythoseinPhase1.Inthiscase,ourestimatesunderstatethetrueimpactofTRACE.(In
SectionVII,weinvestigatePhase1usingaseparatedatasetfromtheNationalAssociationofInsurance
Commissioners.)
ItseemsunlikelythattheeffectsofTRACEoccurredintheirentiretyatthebeginningofPhase1.
EventhoughTRACEstartedcollectinginformationontradeactivityforallbondsfromJuly1,2002,the
scheduleofwhentransactiondatawouldbedisseminatedremaineduncertain.Thetimingofthe
expansionswasnotinitiallyknownandtookplaceincrementally,dependingonbothFINRAandSEC
approval.Forexample,FINRA,thenNASD,approvedPhase2onNovember21,2002,buttheSECdid
notapproveituntilFebruary28,2003.Phase2wasimplementedonMarch3,2003.Thus,participants
knewinadvancethatdisseminationwouldexpand,buttheydidnotexacttiminguntilshortlybeforeit
occurred.
Thesecondassumptionfortobeacausalestimateisthattherearenootherchanges
simultaneouswiththePhasestartdatethataffectsthetradingactivityforthosebondschanging
disseminationstatus.Thatis,inequation(2),theinteractionbetweenDisseminateandPostis
uncorrelatedwithotherunmeasuredfactorsthataffecttradeactivitythatchangeatthesametimeas
thechangeindisseminationstatus(butarenotcausedbythechangeindisseminationstatus).There
aretrendsinthebondmarkettradingduringourtimeperiod,butweareunawareofanychangesto
bondmarkettradingthatcoincidewiththePhasestartdates.
Finally,athirdassumptionisthatwecanmeasurethecounterfactualdifferenceinbondtrading
withthebondsthatdonotchangedisseminationstatus.Thatis,weassumethatthechangeovertime
incontrolbondsbehaviorrevealswhatwouldhaveoccurredtotreatedbondsiftherehadbeenno
changeintheirdisseminationstatus.Notethisassumptiondoesnotmeanthatcontrolbondsmust
havethesamecharacteristicsastreatedbonds,butratherthatthechangeintheirbehaviorcaptures
thecounterfactualtimepath.Thisisimportantbecauseourtreatedbondshavedifferentattributes
thanourcontrolbondsbydefinition.FINRAselectedbondsforPhasesbasedoncharacteristicssuchas
ratingsandissuesize.Forinstance,Phase2bondsareinvestmentgradeandhaveanoriginalissuesize
ofatleast$100million.Hence,ourthirdassumptionwillbeviolatedifthebondtradingactivityvaries
substantiallyovertimeduetodifferentbondcharacteristics.Weexaminethesensitivityofourresults
tothesethreeassumptionsinthenextsection.
Toestimateequation(2),therearetwoimplementationdecisions.First,itisnecessaryto
specifytheestimationwindow.Sincebondstradeinfrequently,alongertimewindowmaybeneeded
toobservechangesintradingactivity.Alongertimewindow,however,mayleadustomisattributethe
effectofachangeindisseminationtounderlyingmarkettrends.Forthesereasons,wereportestimates
20

ofequation(2)forthreedifferentestimationwindowscovering30,60,and90dayssurroundingthe
Phasestartdates.
ThesecondimplementationdecisionishowtodefinethecontrolbondsforanyPhaseforthese
regressions.BecauseofthefourdistinctTRACEPhases,thereareseveralpossibilitiesfordefining
controlbonds.ControlbondscanbedefinedasbondsthatwerealreadydisseminatedbeforethePhase
begins.Forexample,tomeasuretheimpactoftransparencyonPhase2bonds,wecancomparethe
tradingbehaviorofPhase2bondswiththetradingbehaviorofPhase1bonds.Alternatively,acontrol
groupcanbedefinedasbondsthataredisseminatedinalaterPhase.Forexample,forPhase2bonds,
thecontrolgroupcouldbePhase3AandPhase3Bbonds.
Wedefinedourcontrolgroupseveralways,bothincludingPhase1bondsthatwerealready
disseminatedandalsoexcludingPhase1andonlyincludingbondsfromlaterPhasesthatwerenot
disseminated.WefindthatincludingorexcludingPhase1bondsdoesnotchangeourresultsinany
meaningfulway.WiththeexceptionofourrobustnesstestsinTable6,ourTablesallusePhase1bonds
inthecontrolgroups.
AnotherissuewithcontrolgroupsthatwemustconfrontisthatPhase3AandPhase3Boccur
justoverfourmonthsapart,onOctober1,2004andFebruary7,2005,respectively.Ifweusea90day
windowbeforeandafteraPhasetocapturetheeffectsofdissemination,thepostdisseminationtrading
ofPhase3AoverlapswiththepredisseminationtradingofPhase3B.Therefore,wedonotusePhase
3BbondsascontrolsforPhase3Abonds,andviceversa.Whenwepresenttheanalysisbelow,weuse
thebondsinPhases1,3A,and3BascontrolbondsforPhase2,andweusethebondsinPhases1and2
ascontrolbondsforPhases3Aand3B.
IV.B Estimates
Table4reportsestimatesofequation(2)for30,60,and90daywindowsforbondsinPhases2,
3A,and3B,separately.Italsoreportspooledestimates,basedonequation(2),withdatastackedacross
thethreePhases.Thatis,thereareseparateinterceptsoforeachPhaseand
0
and
1
isalsoallowedto
differbyPhase,whiledoesnotdifferbyPhase.
TheestimateoftheeffectofTRACEontradingvolume/issuesize,pooledacrossallthreePhases,
isnegativeandsignificantforallthreeestimationwindows.AcrossallPhases,volume/issuesize(in
percent,i.e.,multipliedby100)dropsby0.027inthe90daywindowarounddissemination,whichis
significantatthe1%level.Thisisa15.2%reductionfrom0.178,theaveragelevelbeforedissemination.
AcrossPhases,theonlystatisticallysignificantreductioninvolume/issuesizeforallestimationwindows
isforPhase3B,whichissignificantatthe1%level.
Inthe90daywindow,TRACEreducestheaveragevolume/issuesize(inpercent)forPhase3B
bondsby0.074.Thisrepresentsa41.3%dropfromtheaveragelevelbeforedissemination.These
findingsreinforcethewithinbondcomparisonsreportedincolumn(9)ofTable3,whichshowsthat
threetimesasmanybondsinPhase3Bhavelowervolumeafterdisseminationthanbefore.
21

Pricestandarddeviation,reportedincolumns(6),(7)and(8),dropssignificantly(atthe1%level)
afterdisseminationforallestimationwindows,andforboththepooledsampleandeachPhase
separately.Inthe90daywindowthepooledestimateofthereductioninpricestandarddeviationis7.7
centsandishighlysignificant.AcrossthePhases,thesmallest90daydropisforPhase3Abonds.These
bondsexperienceasignificantreductionof5.9centsintheirdailypricestandarddeviation,which
representsa6.5%decreaserelativetobeforethestartofthePhase3A.Thelargestdropisforbondsin
Phase3B.Thesebondsexperienceasignificantreductionby16.8cents,whichcorrespondstoa24.7%
reductionfromthepreviouslevel.Thispatternmirrorsthosethepricestandarddeviationresultsinthe
withinbondcomparisonsreportedinTable3.
25

Insummary,theestimatesinTable4suggestthattransparencycausesasignificantreductionin
volume/issuesizeforPhase3Bbonds.Inaddition,dailypricestandarddeviationfallssignificantlyacross
allPhases.SinceforeachPhaseourresultsaremorepreciselyestimatedatthe90daywindowthanat
the30or60daywindowinsubsequenttables,wereportestimatesfromthe90dayestimation
windows.
V. Timing,Robustness,andOtherMeasuresofTradingActivityandPriceDispersion
Inthissection,werevisittheassumptionsunderlyingthedifferencesindifferencesestimates
aboveandreportestimatesforothermeasuresoftradingactivityandpricedispersion.
V.A EventStudyandTimeWindows
Table4doesnottellushowlongittakesforthemarkettoreacttoachangeindissemination.
Changesmaybeimmediateifmarketparticipantsanticipatetheeffectsofdisseminationinadvanceof
Phasestartdates.Ontheotherhand,changesduetodisseminationmayoccurwithdelaybecauseof
adjustmentcosts,suchasrebalancinginventories,facedbymarketparticipants.Delaysmayalsooccur
ifparticipantsrequiretimetoutilizethenewlyavailabledata.Moreover,therelativeinfrequencyof
bondtradingmaymakeitdifficulttodetecttheeffectsofdisseminationinshortestimationperiods.
Toexaminewhentheeffectsofdisseminationbegin,weestimateaneventstudyversionof
theregressionmodelthatallowstheeffectstodifferbyoneweekintervals:
y
it
=o+
0
Disseminate
i
+
w
xOneWeekInterval
t
+
w
Disseminate
i
xOneWeekInterval
t
+c
it,
(3)

25
Themeandailypricestandarddeviationincolumn(5)ofTable4isnotidenticaltothemeandailypricestandard
deviationincolumn(1)ofTable3.InTable3,wecomputetheaveragedailypricestandarddeviation,equally
weightedbybond.InTable4,wecomputetheaveragedailypricestandarddeviationwithoutweightingbybond,
andclusterbybondintheregression.Sincewerequireatleasttwotradesonadaytocalculatedailyprice
standarddeviation,unlikevolume,wedonotobservepricestandarddeviationforeachdayand,hence,the
calculateddailypricestandarddeviationdiffersbetweenTable3and4duetoweighting.Themeasureddailyprice
standarddeviationinTables3and4areclose,andtherelativesizesbyPhasearesimilar.
22

wheretheOneWeekInterval
t
isanindicatorofwhetherdaytisinweekw.Equation(3)isestimated
foreachPhaseseparately.
0
capturesanypreexistingdifferencebetweendisseminatedandnon
disseminatedbonds,while
w
capturestheoveralltrendintradingoutcomeinweekw.
Theestimateof
w
istheamountbywhichtheaveragenewlydisseminatedbonddeviatesin
tradingoutcome(eithervolume/issuesizeorpricestandarddeviation)fromcontrolbondsduringthe
oneweekintervalw.Ifthereisatrendinthemarketthatonlyaffectsbondsthatchangedissemination
status,itshouldbereflectedintherelativelevelsof
w
.Forexample,ifvolumeinnewlydisseminated
bondsistrendingdowninthetimeperiodbeforeachangeindissemination,the
w
swillbehigher
beforethanafter.Sincetheestimatesof
w
arebasedononeweekcontrasts,theywillbeestimated
lesspreciselythanmodelswhichimposeacommoneffectfortheperiodbeforeandaseparatecommon
effectfortheperiodafterasinequation(2).
Figure4plotsvaluesof
w
fortradingvolume/issuesizeforeachweekbyPhase.Weadoptthe
conventionthatweek0includesthedisseminationdateandthesixcalendardaysfollowingit.We
normalize
w
tobezerointheweekbeforethechangeindissemination(i.e.,week1)andweadda
verticallinetotheplotforthatweek.
26
ThepatternsinFigure4forPhase2and3Aareconsistentwith
theresultsinTables3and4.Volume/issuesizeisnotaffectedbytransparencyforbondssincethereis
noshiftinthelevelofcoefficientestimatesafterdisseminationintheFigure.
ThePhase3BplotinFigure4showsasharpandsignificantdropinvolume/issuesizefromthe
weekimmediatelyprecedingdisseminationtothefirstweekafterit.Thissuggeststhatthenegative
volume/issuesizeresultsforPhase3BinTables3and4arecausedbydisseminationandoccurshortly
afterPhase3Bstarts.Inaddition,forPhase3B,theleveloftradingactivityremainslowerforthe12
weeksafterdisseminationbegins.ThispersistentreductionisconsistentwiththeTable4Phase3B
differencesindifferencesestimatesfor30,60,and90daysbeingsimilar.
Forpricestandarddeviation,theeventstudyplotsinFigure5showacleardropat
disseminationforallthreePhases.ThecoefficientsforeachPhaseareatorabovezerobefore
dissemination,andareclearlybelowzeroafterdissemination.Importantly,thereisapronounceddrop
inpricestandarddeviationbetweenweek1andthefirstweekofdisseminationineachofthethree
Phases.TheabsenceofvisualevidenceoftrendsprovidessupportforacausalinterpretationofTRACEs
effectonpricestandarddeviation.
Insummary,theeventstudyplotsinFigure4showavolumeeffectonlyforPhase3Bbonds,
whileFigure5showsadeclineinpricestandarddeviationforallthreePhases.Furthermore,thereisno
pretrendinpricestandarddeviationfornewlydisseminatedbonds.Thisfactprovidessupportforour
identificationassumptionsofincompleteanticipationandnosimultaneousnondisseminationrelated
changesinthebondmarket.Moreover,alargepercentageoftheoveralleffectforpricestandard
deviationoccursimmediatelyafterdissemination.

26
Sincetheeventstudyincludestheperiodfrom90daysbeforeand90daysafterday0,thereisonefewer
calendardayinweek13.
23

V.B TimeTrends
Anotherassumptionunderlyingthedifferencesindifferencesestimatesiscommonparallel
trends.Thatis,weassumethatiftreatedbondshadnotchangedtheirdisseminationstatus,their
tradingbehaviorwouldfollowthesametrajectoryasthecontrolgroupbonds.However,itispossible
thattradingoutcomesfortreatedbondsfollowdifferenttrajectoriesthancontrolbonds.Asdiscussed
aboveinSectionIV,onereasonforthispossibilityisthatthecontrolbondshavedifferentcharacteristics
thantreatedbonds,particularlysinceFINRAusessizeandcreditratingstodeterminePhase
classifications.
Torelaxthecommontrendsassumption,inTable5,weestimatespecificationsallowingthe
tradeoutcomesforbondstoevolveovertimedependingonwhethertheyareinvestmentgradeornot.
Specifically,weestimatemodelswithlinearandquadratictimetrendsbyincludingPhasespecific
quadraticfunctionsoftimeinequation(2)asfollows:
y
it
=o+
0
Disseminate
i
+
01i
InvestmentGrade
i
t+
02i
InvestmentGrade
i
t
2

+
1
Post
t
+Disseminate
i
xPost
t
+c
it,

(4)
whereInvestmentGrade
i
isanindicatorforbondratingsofBBBandabove.ForeachPhase,the
variabletstartsatzeroatthebeginningofthetimewindow.Forthepooledestimate,weestimate
separatePhasespecifictrends.
Sinceequation(4)addsmoreflexibletimetrendstoourdifferencesindifferencesregression,
weanticipateareductionintheprecisionoftheestimatesinTable5comparedtoTable4.The
precisionofeachsignificantestimateinTable5column(2)islowerthanthatinTable4(whichis
repeatedforconvenienceascolumn(1)).Thepooledestimateofvolume/issuesizealthoughsmalleris
stillsignificantatthe5%level.TheestimateforPhase2volume/issuesizebecomesinsignificantwith
trends.Importantly,theestimateforPhase3Bremainssignificantatthe1%level.
Whenestimatingequation(4)forpricestandarddeviation,Table5column(6)showsthatthe
resultsarerobusttotheadditionoftrends.ForeachPhaseseparately,aswellaspooled,theestimates
remainnegativeandsignificantatthe1%level.
V.C ControlGroups
WealsoaddresstherobustnessoftheTable4resultsbyconsideringtwovariationsonthe
controlgroup.First,weeliminatePhase1bondsfromthecontrolgroup.Asdiscussedabove,Phase1
bondsarelargerandmoreactivelytradedthanbondsinanyotherPhase.Itisthereforepossiblethat
thechangeintradingbehaviorofPhase1bondsdoesnotprovideanadequatecounterfactualforbonds
thatchangetheirdisseminationstatus.Incolumns(3)and(7)ofTable5,wereportestimatesfor
volume/issuesizeandpricestandarddeviationwherePhase1bondsarenotusedascontrols.This
meansthatforPhase2,thecontrolbondsarefromPhase3Aand3B.ForPhase3Aand3B,thecontrol
24

bondsarefromPhase2.Theestimatesreportedincolumns(3)and(7)arenearlyidenticaltoourbase
resultsincolumns(1)and(5),respectively.
Second,weconstructamatchedsample,restrictingthetreatedsampletobondsforwhichthere
isasuitablecontrolbondwithsimilarpretreatmentcharacteristics.Thepretreatmentbond
characteristicsweusetoconstructthematchedsampleareissuesize,creditratingatPhasestart,time
tomaturityatPhasestart,andyearssinceissueatPhasestart.
27
Toconstructthematchedsample,we
dividethesample(whichincludesPhase1bonds)byissuesizeintofourquartiles.Fortheotherthree
characteristics,wedivideintwogroups:investmentgradeandhighyield,aboveandbelowthemedian
timetomaturity,andaboveandbelowthemedianyearssinceissue.Thisresultsin32potentialcellsfor
eachPhase.Weexcludeacellifthereareeitherfewerthan5treatedbondsorfewerthan5control
bonds.Whenwedefinethematchedsampleusingourfourbondcharacteristics,wecover99.6%of
Phase2bondsinourvolumesample,butforPhases3Aand3Bthetreatedsampleisonly41.1%and
28.3%,respectivelyforvolume/issuesize.Forpricestandarddeviation,wecover99.9%ofPhase2
bondsinourpricestandarddeviationsample,47.7%ofPhase3Abonds,and28.8%ofPhase3Bbonds.
Theestimatesforthematchedsampledifferencesindifferencesregressionareincolumns(4)
and(8)ofTable5.Tocontrolforbondattributes,weaddadummyvariableforeachcelltoequation
(2),andinteractthecelldummywithPostandtreated.Theirinclusionmeansthatourestimatesarea
weightedaverageofthewithincelldifferencesanddifferencesestimates.Forthematchedsample,
thevolume/issuesizeestimatesincolumn(4)forthepooledsampleandPhase3Bremainnegativeand
significant.Thus,thenegativeandsignificanteffectofdisseminationonvolume/issuesizedocumented
inTable4forPhase3Bandthepooledsampleisrobusttothealternativespecificationsincolumns(2)
(4).
Thepricestandarddeviationresultsforthematchedsampleincolumn(8)aresimilartothosein
columns(5)(7)fortheboththepooledandPhasesamples.Theonlydifferenceworthhighlightingis
thatforPhase3B,theeffectonpricestandarddeviationisnolongersignificant.Thisreductionin
significancemaybeduetothesmallsamplesizeofonly325treatedand1,582controlbonds.Thus,
examiningcolumns(5)(8)ofTable5showsthatthenegativeandsignificanteffectofdissemination
documentedinTable4isrobustacrossallalternativespecificationsforthepooledsample,andPhases2
and3A.TheresultsarealsorobustfortwoofthethreealternativespecificationsforPhase3B.
V.D AlternativeMeasuresofTradingActivityandPriceDispersion
TradingActivity
Sofar,wevefocusedourinvestigationonvolume/issuesizeandpricestandarddeviationasthe
measuresofTRACEsimpactonbondtrading.Next,weconsidersomealternativemeasuresoftrading
activityandpricedispersioninTable6and7,respectively.BothTablesreportestimatesfromthe

27
Weeliminatebondsthatareunratedfromthematchedsample.
25

differencesindifferencesregressionswith90daywindowsusedinTables4,butwithdifferent
outcomes.
Asdescribedabove,TRACEproponentsexpectedthattransparencywouldincreasetrading
activity,expandmarketparticipation,andattractgreaterretailinterest.
28
InTable6,weconsider
volume(notnormalizedbyissuesize),theprobabilityoftrade,theprobabilityofalargetrade,the
numberoftrades,andtheaveragetradesize.Theprobabilityoftradeisthepercentageofdaysabond
tradesduringoursampleperiod.TheoddnumberedcolumnsofTable6reporttheaveragevalueofthe
dependentvariablefortreatedbondsinthe90daysbeforedissemination.Theevennumberedcolumns
reportthedifferencesindifferencesestimateforeachoftheoutcomes.
Beforeturningtotheeffectsofdisseminationonalternativemeasuresoftradingactivity,we
notesomeimportantdifferencesintradingactivityacrossPhasesinmeansreportedintheodd
numberedcolumnsinTable6.TradesizesforPhase3Bbondsarequitelarge,butPhase3Bbondstrade
infrequently.Forinstance,theaveragetradesizeforPhase3Bbondsis1,205,940,whichismuchlarger
thanPhase2bondsandmorethantwicetheaveragesizeofPhase3Abonds.Despitethislargertrade
size,volumeforPhase3BbondsismuchsmallerthanPhase2bonds,andapproximatelythesamesize
asPhase3Abonds.ThisisexplainedbythemuchlowerprobabilityoftradingforPhase3Bbonds.
DisseminationcausesasignificantreductioninvolumeforthepooledsampleandforPhases3A
and3Bseparatelyasseenincolumn(2).Forthepooledsample,thereis17.2%percentreductionin
volume/issueafterdissemination,significantatthe1%level.ForPhase3Abonds,thereductionis
28.7%,whileforPhase3Bbonds,thereductionis26.8%,bothsignificantatthe5%level.The
percentagereductionvolumeforinPhase3Bisnotaslargeasthepercentagereductioninvolume/issue
sizeinTable4andthesignificancelevelislower.Thisdifferencemaybeduetogreaterskewnessfor
tradingvolume,causedbyidiosyncraticlargetrades,comparedtovolume/issuesizewhenPhase1are
includedinthecontrols.AlthoughnotshownintheTable,whenweeliminatePhase1bondsfromour
differencesindifferencesregressiononvolume,onlythePhase3Bandpooledestimatesarenegative
andbotharesignificantatthe1%level.
29

InthenexttwocolumnsofTable6,wefitmodelsoftheprobabilityofanytradeandthe
probabilityofatradeover$1millioninsize.InthePublicTRACEdataset,TRACEcensoredthereporting
oftradesgreaterthan$1million(forhighyield)and$5million(forinvestmentgrade).Thiswasdueto
objectionsfromdealersandcertaininstitutionalmarketparticipantswhoclaimedthatitwouldbe
possibletoinfertheirtradingpositionsfromthereleaseoflargetradesizesandthereforeplacethemat
acompetitivedisadvantage.
Ourestimatesfortheprobabilityofanytradeindicatethatinthepooledsample,TRACEreduces
trading.However,therearesignificantoppositepatternsbyPhase.TheprobabilityoftradeforPhase2

28
FINRAdefinesretailtradesas$100,000orless(Ketchum2012).
29
TheestimateforPhase3BvolumewithoutPhase1asacontrolis96,507.7,similartoourestimateof98,343.6
inTable6,butthestandarderroris19,386.6,muchbelowthestandarderrorinTable6of45,222.4.
26

bondsdecreasessignificantlyatthe1%level,theprobabilityoftradeforPhase3Abondsincreases
significantlyatthe1%level,andtheprobabilityoftradeinPhase3Bdecreasessignificantlyatthe10%
level.Whenwemeasureofprobabilityoftradesover$1millioninsize,theeffectforPhase3Aisno
longersignificantlypositive,buttheeffectforPhase2and3Bremainsignificantlynegative.ForPhase
3B,thereductionintheprobabilityofalargetradeis0.012,whichisa23.1%reductionfromthemean
levelof0.052.Thus,thesetwofindingssuggestthatTRACEsinfluenceonparticipation,asmeasuredby
probabilityoftrade,isnotpositiveasproponentsanticipated.
Theresultsforthenumberoftradesarealsosimilartothatforvolume/issuesize.Incolumn(8),
thechangeinthenumberoftradesforthepooledsampleandPhase3Bisnegativeandsignificantat
the1%level.Interestingly,the0.49reductioninthenumberoftradesinPhase3Bofisgreaterthanthe
meannumberoftrades,0.30,priortodissemination.Thereasonforthisisthatthenumberoftrades
forPhase3Bbondswhichtrademostfrequentlyexperienceagreaterreductionthanthenumberof
tradesforPhase3Bbondswhichtradeinfrequently.
30

Wealsoexamineaveragetradesizeincolumns(9)and(10).Thoseresultsrepeatthepatternof
asignificantdeclineforthepooledresultandforPhase3B.Itsworthnotingthattradesizesarelarger
forPhase3BthaninanyotherPhase.Thereductionintradesizesoccurseventhoughcertain
infrequentlytradedPhase3Bbondsweresubjecttodelayeddisseminationiftheirtransactionsizewas
$1millionorgreater.
31
TheseresultsimplythatthedeclineoflargetradesinPhase3Bplayalargerole
inouroverallvolumefindings.
Finally,inunreportedtabulations,wealsofindthatTRACEdoesnotincreasethelikelihoodof
retailsizetrades.Forinstance,thepooledestimatefortheprobabilityofatradelessthan$100,000is
0.000withstandarderror0.00128.InPhase2,theestimateissignificantlynegative,0.0127with
standarderror0.00218.Hence,TRACEdidnotincreasethelikelihoodofretailsizetrades.
Insummary,theresultsinTable6showthatvolume,probabilityofalargetrade,numberof
trades,andtradesizefollowthesamepatternasvolume/issuesize.Thus,TRACEdoesnotappearto
haveincreasedmarketparticipationevenfromretailinvestors.
PriceDispersion
Aweaknessofourdailypricedispersionmeasureisthatsincewerequireatleasttwotradesina
day,itcannotbecomputedforallbonds.ItispossiblethatTRACEalsoaffectspricedispersionforbonds
thatdonottradeatleasttwiceaday.Toexaminethispossibility,inTable7,weconsiderthree

30
Inanunreportedanalysis,wefurtherinvestigatedthereductioninthenumberoftrades.Thereisagradientin
thepercentagereductionintheprobabilitythatabondtradesmultipletimesaday.Thepercentagereductionin
thelikelihoodoftradingatleast20timesadayisgreaterthanthepercentagereductionatleast10timesaday,
whichinturnisgreaterthanthepercentagereductionintheprobabilityoftradingatleast5timesaday.
31
Aninfrequentlytradedbondisonethatdoesnotaverageoneormoretradesperdayoverlast20businessdays
ofa90dayperioddeterminedeachquarterbyNASD.
27

additionalmeasuresofpricedispersion:theintradayabsolutespread(maxpriceminusminprice)
32
,
thepricestandarddeviationofalltradesin10daywindows,andthepricestandarddeviationofall
tradesin30daywindows.Usingthe10dayand30daypricestandarddeviationincreasesoursample
sizesslightly.Forinstance,withthe30daymeasureourcoverageofPhase3Abondsis63.0%andPhase
3Bbondsis42.1%comparedto57.0%and40.0%respectivelywiththeintradaymeasure.
TheresultsonothermeasuresofpricedispersioninTable7confirmthepricestandard
deviationresultsinTables4and5.EverymeasureforthepooledsampleandforeachPhaseisnegative
andsignificant.Aswithdailypricestandarddeviation,thelargesteffectofdisseminationoccursin
Phase3Bforallthreemeasuresofdispersion.Fortheabsolutespread,areductionof39.7cents
represents28.6%oftheaveragespreadpretransparency.Thispercentagereductionissimilartothe
24.7%reductionfordailypricestandarddeviation.Thus,transparencyreducespricedispersionforfour
differentmetricsforallPhases.
VI. HeterogeneityinCreditRatingandIssueSize
WhilethepricedispersionresultsareconsistentacrossallPhases,theresultsontradingactivity
differforPhase3B.WhatisdifferentaboutthebondsinPhase3B?FINRAselectsthebondsineach
Phaseusingcreditrating,issuesize,andtradingactivity.ExaminingcreditratingandissuesizeinTable2
showsthatPhase3BdiffersfromtheotherPhasesbecauseitistheonlyPhasewithamajorityofhigh
yieldbonds.However,thereissomeoverlapofcreditratingandissuesizebetweenPhases,makingit
possibletoidentifywhethercreditratingorsizeisthemaindeterminantsofthePhase3Bresults.
InTable8,wepoolthePhases,andsplitthetreatedsamplebycreditratingandissuesize.We
splitcreditratingsintoinvestmentgrade,BBBorabove,andhighyield,BB+orbelow.Wesplitissue
sizeintobondswithissuesizelessthanorgreaterthanorequalto$100million.Thesecriteriafollow
FINRAsbreakpointsforPhase2classification.Thecontrolbondsremainthesameacrosscolumns.The
overlapbetweenPhasesoncreditqualityandissuesizeisshowninTable8.Forthe3,164highyield
bondsinoursample,634arefromPhase3A,whiletheremainderisinPhase3B.For9,087bondswith
issuesizelessthan$100million,677arefromPhase3B,while8,410arefromPhase3Aand10arefrom
Phase2.Thus,poolingthehighyieldsampleamountstocombiningmostofPhase3Bwithaportionof
Phase3A,whilepoolingthesmallissuesizesampleamountstocombiningmostofPhase3Awitha
portionofPhase3B.
Theeffectofdisseminationonvolume/issuesizeonhighyieldbondsisahighlysignificant
0.057,whileitisasmallerandlesssignificant0.013forinvestmentgradebonds,asshownincolumns
(1)and(2)ofTable8.This4.4ratioofeffectsrepresentsastatisticallysignificantdifferenceasshownby
thepvaluefromtheChisquaretestreportedbelowtheestimates.Turningtoissuesize,theeffectof
disseminationonvolume/issuesizeisprimarilydrivenbybondswithissuesize$100million.The
estimateforbondswithissuesize<$100millionisnotstatisticallysignificantandclosetozero.Thisis

32
UsingequitydatafromTAQ,CorwinandSchultz(2012)demonstratethatintradayabsolutespreadishighly
correlatedwithbidaskspreadsandshowthatitalsooutperformsotherlowfrequencyspreadmeasures.
28

consistentwiththeresultsinTable4,whichshowthatPhase3Abondsdonotexperienceareductionin
tradingactivity.Thesebondsbydefinitionprimarilyhaveissuesizelessthan$100million.Thus,the
volume/issuesizefindingsappeartobedrivenbylowcreditbondsorbondswithissuesize$100
million.
Toexaminewhichfeatureismoreresponsiblefordrivingthevolume/issuesizeresults,wenext
reportatwowaysplitofthesample.Incolumn(5)and(6),wesplittheinvestmentgradesampleinto
smallandlargeissuesizebonds.Incolumn(7)and(8),wesplitthehighyieldsampleintosmalland
largeissuesizebonds.Theestimateforsmallinvestmentgradebondsisnotsignificant,butthe
estimateforlargeinvestmentgradebondsisnegativeandsignificant.Thisestimate,however,issmaller
thaneitherestimateforhighyieldbonds,whicharebothnegativeandsimilarinsizeforbothsmalland
largeissuesizebonds.Therefore,itappearsthattheresultsforvolume/issueareaffectedmoreby
creditratingsthanissuesize.
ThesecondpanelofTable8reportsonpricestandarddeviationsplitbyratingsandissuesize.
Eachoftheestimatesisnegativeandhighlysignificantforallsubgroups,butthereductioninprice
standarddeviationissignificantlylargerforhighyieldbondsthanforinvestmentgradebonds
throughout.Whenexaminingissuesize,thereductioninpricedispersionisonlyslightlylargerfor
bondswithissuesize$100million.
Thus,thereasontheresultsonPhase3BaredifferentthantheotherPhasesislargelybecause
ofthehighproportionofhighyieldbondsinthatPhase.Althoughnotshown,theothermeasuresof
tradingactivityinTable6andthemeasuresofpricedispersioninTable7decreasemoreforhighyield
bondsthanforinvestmentgradebonds.Therefore,ourinitialquestioninthissubsectionofwhythe
bondsinPhase3Bbehavedifferentlyneedstoberecasttoaskwhydohighyieldbondsbehave
differently?
Thefactthatinvestmentgradeandhighyieldbondsbehavedifferentlyisnotasurprise.
Investmentgradebondstradenearparexceptforpricefluctuationsduetomarketinterestrate
movements.Thismeansthattheycanbetreatedassubstituteswithoneanotherwithincreditrating
categories.Highyieldbonds,evenwithinthesameratingcategory,arenotascloseassubstitutessince
theyaresubjecttoidiosyncratic,firmspecificrisks.
33
Moreover,somemarketparticipantssuchas
pensionandmutualfundshaverulesrestrictingownershipofhighyieldbonds.Furthermore,since
investmentgradebondstrademorefrequentlythanhighyield,theyarealsolessopaque.Forinstance,
theprobabilityofatradeonanygivenday(preTRACE)ismorethanthreetimeshigherforthe
investmentgradesampleinPhase2comparedtothemostlyhighyieldsampleinPhase3B.Giventhese
differences,TRACEprobablyprovidedmoreincrementalinformationontradingactivityforhighyield
bondsthanforinvestmentgradebonds.

33
Asquith,Au,Covert,andPathak(2013)documentsignificantdifferencesbetweeninvestmentgradeandhigh
yieldbondsinthemarketforborrowingbonds.
29

Inaddition,thebondmarketisadealermarket,sodealerinventorywillaffecttradinglevelsand
thepotentialimpactsofTRACE.Dealersonlyholdinventoryinthosebondswithsufficienttrading
activitytocovertheircarrycost.Thinlytradedbondsmayrequiredealerstohavehigherspreadsto
covertheirholdingcosts.SinceTRACEreducespricedispersionsignificantly,thebenefitofholding
bondsininventorydecreases.TRACEreducespricedispersionthemostforhighyieldbonds,sothe
incentivetoreduceinventoryisstrongestforthosebonds.Thus,lowertradingactivityinhighyield
bondspostTRACEmaybetheresultofasupplysideresponseofdealers.
VII. NAIC
TheevidencesofarleavesopenthequestionofTRACEsimpactonPhase1bonds.TRACEdata
doesnotexistbeforeJuly2,2002whenPhase1begins;therefore,ouranalysisoftheeffectsof
transparencyusingtradesbothbeforeandafterdisseminationinTRACEislimitedtoPhases2,3A,and
3B.Phase1isimportantbecause,asdiscussedaboveinSectionIV,disseminationofPhase1bondsmay
affectthecorporatebondmarketbehaviormorebroadlyiftransparencyinpartofthemarketinfluences
tradingintherestofthemarket.AsdescribedinSectionII,Bessembinder,Maxwell,andVenkataraman
(2006)examinetradingcostsinPhase1usingdatafromtheNationalAssociationofInsurance
Companies(NAIC).WhiletheNAICdatabaseisnotascompleteasTRACEbecauseitonlycontains
transactiondataforinsurancecompanies,theNAICdatabeginsin1994.
Inthissection,wedescribetheNAICdataandusethatdatabasefromJanuary1,2000through
December31,2006toexaminetheeffectsofPhase1ofTRACEaswellastoverifyourresultsforPhases
2,3A,and3B.TheNAICdatabasealsocontainsinformationaboutdealeractivitynotavailableinTRACE,
whichweusetoexaminehowTRACEaffecteddealermarketshare.
BeforeusingtheNAICdata,wefirstcompareittotheTRACEdatabothforcoverageandto
determinewhetherinsurancecompaniestradedifferentlythantherestofthecorporatebondmarket.
AccordingtotheFederalReservesFlowofFundsstatement,insurancecompaniesown24.6%of
outstandingcorporatebondsin2002Q32006Q4.
34
Whileseveralotherpapers,notablyBessembinder,
Maxwell,andVenkataraman(2006)andCampbellandTaksler(2003),havepreviouslyusedNAICdata,
toourknowledgeweprovidethefirstdirectcomparisonofthetwodatabases.
35

TheNAICDataAppendixandTablesB1andB2describetheNAICdataandhowitcomparesto
theTRACEdatabase.Importantly,intheprocessofmakingthiscomparison,wediscoveredasystematic
errorinhowNAICstradesarereported.ManyNAICtradesaredisaggregatedandreportedasmultiple
transactionsintheNAICdatabase.SincepreviousresearchontheNAICdatabase(e.g.Bessembinder,
Maxwell,andVenkataraman(2006))donotmentionthisproblemofdisaggregation,weassumethat

34
CampbellandTaksler(2003)estimatethatinsurancecompaniesholdbetweenonethirdand40%ofcorporate
bonds.
35
Bessembinder,Maxwell,andVenkataraman(2006)dodividetheNAICdatabaseintoTRACEandnonTRACE
samples,butdonotcomparetradingbyNAICmemberstotradingbynonNAICmembers.
30

theytreatedthesemultipletransactionsasmultipletrades,whentheyarenot.Thisleadstoanover
reportinginthenumberoftradesandanunderreportingofthetruepricedispersion.
36

NAICsreportingrequirementsrequiremanyindividualtradestobesplitintoseparaterecords
forreportingpurposes.Forexample,insurancecompaniesmustseparatelyreportbondspurchasedand
soldinthesamecalendaryearfrombondspurchasedandheldthroughtheendoftheyear.Thismeans
ifaninsurancecompanypurchases$1millionparofabondonJanuary1,2001andsells$500,000ofthis
beforeDecember31,2001andtheremaining$500,000inthefollowingyear,underNAICreporting
guidelines,thissinglepurchasewouldbesplitintotwoseparatepurchasesof$500,000each.Ifthisis
treatedastwotrades,volumeisunaffected,butthenumberoftradesisoverstatedandpricestandard
deviationisunderstated.Amorecompletediscussionofthemisreportingoftradesisexplainedinthe
NAICAppendix.
TableB1reportsthestepswetooktoprocesstherawNAICfileintoourcleanedNAICdatabase.
WeonlyusethosebondsfromtheNAICdatabasethatarealsointheCleanedHistoricalTRACEdatabase
forouranalysis.
37
Becauseofthemisreportingissuediscussedabove,TableB1reportsthetotalnumber
oftransactionsfromtheNAICdatabaseinthecolumnlabeledUngroupedTrades.Italsoreportsan
estimateofthetruenumberoftradesbygroupingtransactionswithidenticalCUSIP,date,price,and
counterpartyintoasinglerecordwithvolumesummedforthegrouping.ThesearelabeledGrouped
TradesinaseparatecolumninTableB1.TheNAICdataappendixcontainsmoredetailsonthis
process.FromJuly2,2002toDecember31,2006,thecleanNAICdatabasecontains14,574bonds.
Thereare481,135ungroupedtrades,whichcorrespondto394,679groupedtrades.Thiscomparesto
21,217,807tradeson30,958bondsintheCleanedHistoricalTRACEdatabaseoverthesameperiod.
TableB2comparesthecleanedNAICandTRACEdatasetsbyPhaseandshowsthatinsurance
companiestradeverydifferentlythantherestofthecorporatebondmarketforthesametimeperiod
anduniverseofbonds.
38
Itcomparesthenumberofbondscovered,thetradingvolume,thenumberof
trades,andthetradesizesinbothcleaneddatabases.AhighpercentageofPhase1,Phase2,andPhase
3BTRACEbondsarecontainedinNAIC(94.2%,81.7%,and72.7%respectively).NAICcontains42.2%of
Phase3ATRACEbonds.NAICvolume,however,ismuchsmallerpercentageofTRACEvolumeforall
Phases.ForPhase1bonds,duringthe90daysaftertheannouncementofthePhase,theNAICvolumeis
6.3%ofcomparableTRACEvolume.ForPhase2,3A,and3B,NAICvolumeis11.5%,7.2%,and4.4%of
TRACEvolumerespectively.

36
WedonotknowtradedisaggregationchangesBessembinder,Maxwell,andVenkataramans(2006)results.
However,sinceEdwards,Harris,andPiwowar(2007)resultsaresimilarusingTRACEdata,weassumethisissue
doesnotchangetheresultssubstantially.
37
45,902bondsintheNAICdatabasearenotintheCleanedHistoricalTRACEdatabase.Alargefractionofthese
bondsareSECRule144abonds.SECRule144AbondsarenotcoveredbyTRACEduringoursampleperiod.
38
InordertoexaminetradinginPhase1bondsbeforethestartofPhase1,weuseNAICdatafromtheperiod
January1,2000untilJuly1,2002.WeonlycomparetradingactivitybetweenthedatabasesduringtheTRACE
period,whichstartsJuly2,2002.
31

ThenumberofNAICtradesisanevensmallerpercentageofTRACEtradesforPhases1,2,and
3A.InPhase3B,thepercentageoftradesinTRACEislowerthanthepercentageofvolume.Thismeans
forPhases1,2,and3A,TRACEtradesareusuallylargerthanrestofthemarket.GroupedNAICtrades
arelargerthanTRACEtrades,onaverage,byafactorof4.1inPhase1,2.1inPhase2,2.2inPhase3A.
Thus,NAICisasmallshareofTRACEsvolumeandtrades,buttheaveragesizeofNAICtradesisoften
largerthantheaverageTRACEtrade.
TableB2alsocomparespricestandarddeviationbetweenNAICandTRACE.Thestandard
deviationforNAICtradesistypicallymuchsmallerthanforTRACE.ThisistrueforeachPhaseusingthe
ungroupedNAICtradedatabase,andistrueforPhases1,2,and3BusingthegroupedNAICtrade
database.ItsworthnotingthattheNAICpricestandarddeviationismeasuredusingfarfewerCUSIPS
andbonddays.InPhase2forexample,wemeasureTRACEpricestandarddeviationfor2,130CUSIPs
and40,713bonddays,whileweonlymeasureitfor261CUSIPsand481bonddaysinNAICusing
groupedtrades.Thisrestrictsourabilitytodrawstronginferencesaboutpricestandarddeviationusing
theNAICsample.
WeconcludethattheNAICdatabaserepresentsasmallfractionofthetradinginthecorporate
bondmarketcoveredbyTRACE.SummingvolumeacrossallfourPhasesinthe90daysafterPhase
start,NAICvolumeisonly7.6%oftotalTRACEvolume.NAICtradesarealsotypicallylargerthanthose
intheTRACEdatabase.Itisthereforepossiblethattheeffectsoftransparencymaymanifest
themselvesdifferentlyinTRACEthaninNAIC.Asaconsequence,conclusionsdrawnaboutTRACEfrom
theNAICdatasetmaynotberepresentativeoftheoverallcorporatebondmarket.
TradingActivityandPriceDispersionusingNAICdata
Table9reportsvolume/issuesizeandpricestandarddeviation(bothgroupedandungrouped)
for90daysbeforeandaftereachPhaseusingtheNAICdatabase.Italsoreportsincolumn(9)
coefficientsfromdifferencesindifferencesregressionssimilartothosereportedinTable4.ThePhase
1differencesindifferencesresultsincolumn(9)ofTable9arenotsignificantforeithervolume/issue
sizeorpricestandarddeviation.Inaddition,thewithinbondcomparisons,shownincolumns(5)and
(6),aremixed.Thatis,thefractionofPhase1bondsthatexperienceadecreaseinvolume/issuesizeis
greaterthanthefractionexperiencinganincrease,butthefractionofPhase1bondsthatexperiencea
decreaseispricestandarddeviationisless.
ThereareseveralpossiblereasonsforthelackofsignificantorconsistentresultsforPhase1.It
maybethatTRACEhasnoeffectonPhase1bonds.Itmayalsobethattheinsurancesegmentofthe
corporatebondmarket,whichNAICmeasures,behavesverydifferentlythantheremainderofthe
market.ItmayalsobebecausetheamountoftradingcapturedbyNAICissomuchsmallerthanthe
entirecorporatebondmarketcoveredbyTRACE,makingitdifficulttodetectchangesdueto
dissemination.
TheresultsforPhases2,3A,and3Bprovidefurtherevidenceonthesealternativesexplanations.
TheNAICpricestandarddeviationresultsincolumn(9)forPhases2and3AinTable9arenot
32

significant,whileallofourpricedispersionresultsusingtheTRACEdatabasefoundsignificantdeclines.
Moreover,inPhase3B,wheretheTRACEresultsontradingactivityandpricestandarddeviationare
strongest,thecorrespondingNAICestimatesaremarginallysignificant.Thus,thelackofsignificant
Phase1NAICresultsdoesnotnecessarilyimplythatTRACEdidnothaveaneffectinPhase1.
DealerTradingActivity
TheNAICdatabasecontainsadditionalinformationnotavailableinTRACE.Inparticular,it
identifiesthecounterpartydealeroppositetheNAICmemberforeachtrade.Bessembinder,Maxwell,
andVenkataraman(2006)usethisdatatoexaminedealerconcentrationratiosduringPhase1.Though
itonlyrepresentsdealertradeswithinsurancecompanies,thisdataprovidesanopportunitytomeasure
howdealersareaffectedbydissemination.TheNAICDataAppendixdescribeshowwecomputetrading
activitybydealer.Weemployourdifferencesindifferencesdesigntoexaminedealervolumeandthe
numberoftradesacrossallfourPhases.Wepresentresultsforboththetop4andtop8dealers.The
top4dealerscover37.9%ofvolumeand32.7%oftrades.Thetop8dealerscover68.4%ofvolumeand
58.6%oftrades.
39

Table10reportsdifferencesindifferencesestimatesoftheeffectofTRACEondealervolume
andnumberoftrades.ForeachPhase,wecomputetheparvalueoftradesandcountthenumberof
tradesthatacounterpartywaspartytoduringthe12weeksbeforeandafterthePhasestart.We
examineweeklyvolumeandnumberoftradesbecauseNAICtradeslessfrequently.AcrossPhases,
thereisa15.3%reductioninparvolumeforeachofthetop4dealersduetoTRACEanda15.6%
reductionforeachofthetop8dealers.WhenexaminingdealervolumeestimatesbyPhase,thereisa
significantdropinvolumetradedforbothtop4andtop8dealersinPhases1,3A,and3B.Thereisalso
areductioninPhase2,butitisnotsignificant.Theanalysisonthenumberoftradesperdealeris
similar.
Overall,theresultsindicatethattradingactivitybetweendealersandinsurancecompaniesis
rebalancedawayfromthelargestdealersduetoTRACE.Ifthisresultholdsfortheentirecorporatebond
market,thiswouldindicatethatTRACE,althoughreducingoveralltradingactivity,alsoleveledthe
playingfieldbetweenthelargestdealersandtheremainingdealers.
VIII. ConclusionsandImplications
TheintroductionofTRACE,whichwasimplementedinfourPhasesoverathreeandahalfyear
period,combinedwiththeavailabilityoftradingrecordsbeforeandafterdissemination,providesa
uniqueopportunitytostudyhowmarketsrespondtotransparency.Thispaperfindsthatmandated
posttradetransparencyinthecorporatebondmarketleadstoanoverallreductionintradingactivity.
NosampleofbondsinanyPhaseexperiencesanincreaseintradingactivityandPhase3Bbonds
experiencealargeandsignificantreduction.Forthatgroup,TRACEreducestradingactivityby41.3%in

39
Weexploredotherdivisionssuchastop2,top5,andtop10,butalloftheresultsarequalitativelysimilarto
whatwedescribeherein.
33

the90daysfollowingthedisseminationofpriceandvolumeinformation.Thisfindingisrobustacross
differentmeasuresoftradingactivityandalternativeregressionspecifications.Eventstudiessupporta
causalinterpretationofourfindingssincethedecreaseoccursimmediatelyafterthestartof
dissemination.
PricedispersionalsodecreasesduetoTRACE.Thisdecreaseissignificantacrossbondsthat
changedisseminationinPhases2,3A,and3B,butislargest,24.7%,forPhase3Bbonds.Thisfindingis
alsorobustacrossdifferentmeasuresofpricedispersionandalternativeregressionspecifications.
Moreover,eventstudiesshowthatthefallinpricedispersionoccursimmediatelyafterthestartof
dissemination.Itisimportanttonote,ifthetransparencyintroducedinPhase1affectsbondsthat
becometransparentinsubsequentPhases,ourestimatesareprobablylowerboundsonTRACEsoverall
impact.
Tofurtherinvestigatehowbondcharacteristicsaffectourresults,weexaminetradingactivity
andpricedispersionforsampleswiththesamecreditqualityandissuesizeacrossPhases.Wefindthat
thecreditqualityisthemostconsistentfactorinexplainingthereductionintradingactivity.Highyield
bondsexperienceasignificantlygreaterreductionintradingactivitythaninvestmentgradebonds.Our
resultsconfirmtheviewthattransparencyhasalimitedimpactonthetradingactivityofthemostliquid
andinvestmentgradesegmentofthemarket.Moreover,ourresultsshowthatignoringthelessactively
tradedandhighyieldbondsinPhase3BleadstoanincompleteaccountofTRACEseffectontrading
activity.
OnepossiblereasonTRACEhasdifferenteffectsonhighyieldbondsisthatpreTRACEtradingin
highyieldbondsmayberelativelymoreopaquethantradingininvestmentgradebonds.Asaresult,
TRACEmayprovidemoreincrementalinformationandthuscauselargerchangeinthehighyield
market.AsecondpossiblereasonisthatthelowertradingactivityinhighyieldbondspostTRACEmay
betheresultofasupplysideresponseofdealers.Pricedispersionfallsmoreforhighyieldbondspost
TRACE.Inaddition,highyieldbondstradelessfrequentlythaninvestmentgradebondspreTRACE.The
factthatthereisalargereductionofpricedispersionforthinlytradedhighyieldbondsmayresultin
lowerspreadsandthuscausedealerstoholdlessinventory.Thisinturnmayresultinadecreasein
tradingactivity.
Thereareseveralwelfareimplicationsofincreasedtransparencyinthecorporatebondmarket.
Oneconsequenceisthatitmaychangetherelativebargainingpositionsofinvestorsanddealers,
allowinginvestorstoobtainfairerpricesattheexpenseofdealers.Thereductioninpricedispersion
shouldallowinvestorsanddealerstobasetheircapitalallocationandinventoryholdingdecisionson
morestableprices.Therefore,thereductionofpricedispersionlikelybenefitscustomersandpossibly,
butnotnecessarily,dealers.
Theimplicationsofareductionintradingactivityarenotasclear.Whetherareductionin
tradingactivityisdesirabledependsonwhymarketparticipantstrade.Adecreaseintradingactivity
maybebeneficialifmuchofthetradinginabondisunnecessarynoisetrading.Ontheotherhand,if
34

mosttradingisinformationbased,adecreaseintradingactivitymayslowdownhowquicklyprices
reflectnewinformation.Inaddition,ifthedecreaseintradingactivityistheresultofdealers
unwillingnesstoholdinventory,transparencywillhavecausedareductionintherangeofinvesting
opportunities.Thatis,evenifadeclineinpricedispersionreflectsadecreaseintransactioncosts,the
concomitantdecreaseintradingactivitycouldreflectanincreasedcostoftransactingduetothe
inabilitytocompletetrades.
Ourresultsonthecorporatebondmarkethavetwomajorimplicationsforthecurrentand
plannedexpansionsofmandatedmarkettransparency.Theimplicitassumptionunderlyingthe
proposedTRACEextensionsandtheuseofTRACEasatemplateforregulationssuchasDoddFrankis
thattransparencyisuniversallybeneficial.First,itisnotclearthattransparencyforallinstrumentsis
necessarilybeneficial.Overall,tradinginthecorporatebondmarketislargeandactive,although,as
seen,notcomparableacrossalltypesofbonds.Manyoverthecountersecuritiesaresimilartothe
bondsFINRAplacedinPhase3B.Thatis,theyareinfrequentlytraded,subjecttodealerinventory
availability,andtradinginthesesecuritiesismotivatedbyidiosyncratic,firmspecificinformation.
Therefore,theexpansionofTRACEinspiredregulations,suchasthosefor144abonds,assetand
mortgagebackedsecurities,andtheswapmarket,mayhaveadverseconsequencesontradingactivity
andmaynot,onnet,bebeneficial.
Second,ourresultsindicatethattransparencyaffectsdifferentsegmentsofthesamemarketin
differentways.Asaconsequence,ourresultsprovideempiricalsupportfortheviewthatnotevery
segmentofeachsecuritymarketshouldbesubjecttothesamedegreeofmandatedtransparency.Both
academiccommentators(Frenchetal.,(2010),Acharyaetal.(2009))andleadingindustryassociations
(e.g.,FinancialServicesForum,etal.,(2011))havearticulatedthisposition.Despitethese
recommendations,theexpansionoftransparencybytheCommodityFuturesTradingCommission
(CFTC)invariousswapmarkets,i.e.interestrate,creditindex,equity,foreignexchangeand
commodities,inDecember2012andFebruary2013wasimmediateforallswapsinthosemarkets.This
standsinsharpcontrasttoFINRAscautiousimplementationofTRACEinPhases.Thefactthatthe
effectoftransparencyvariessignificantlyacrosscategoriesofbondswithinthecorporatebondmarket
suggeststhatadditionalresearchwillberequiredtoevaluatethetradeoffsassociatedwithuniversal
transparencyinotheroverthecountersecurities.
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
Figure 1. Weekly Trading Volume by Phase
Phase 2
Phase 3A
Phase 3B
* Figure does not include trading days that SIFMA recommends that bond dealers take off or operate for less than a full day. Figure also does not include the two weeks spanning
Christmas and New Years Day.
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
0.70%
0.80%
0.90%
1.00%
Figure 2. Weekly Trading Volume/Issue Size by Phase
Phase 1
Phase 2
Phase 3A
Phase 3B
* Figure does not include trading days that SIFMA recommends that bond dealers take off or operate for less than a full day. Figure lso does not include the two weeks spanning
Christmas and New Years Day.
$-
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
$1.40
$1.60
$1.80
$2.00
Figure 3. Weekly Price Standard Deviation by Phase
Phase 1
Phase 2
Phase 3A
Phase 3B
* Figure does not include trading days that SIFMA recommends that bond dealers take off or operate for less than a full day. Figure also does not include the two weeks spanning
Christmas and New Years Day.
Figure4.EventStudyforWeeklyVolume/IssueSize

Figure plots coefficients on Disseminate x Week variables from event study regressions where the dependent variable is weekly Volume/Issue
Size.DisseminateisanindicatorforabondthatbecomesdisseminatedinthePhase.Thexaxesrepresentweeks,where,0isweekofMarch3,
2003forPhase2,0isweekofOctober1,2004forPhase3A,and0isweekofFebruary7,2005forPhase3B.
Figure5.EventStudyforWeeklyPriceStandardDeviation

FigureplotscoefficientsonDisseminatexWeekvariablesfromeventstudyregressionswherethedependentvariableisweeklypricestandard
deviation. Disseminate is an indicator for a bond that becomes disseminated in the Phase. The xaxes represent weeks, where, 0 is week of
March3,2003forPhase2,0isweekofOctober1,2004forPhase3A,and0isweekofFebruary7,2005forPhase3B.
Table1.TimelineofMajorTRACERegulatoryChanges
Sample Date BondsAffected TimetoReport
Phase1 July1,2002 InvestmentGradeTRACEeligiblebondshavinganinitialissueof$1
billionorgreater
75Minutes
FINRA50 July1,2002
50NonInvestmentGrade(HighYield)bondsdisseminatedunderFixed
IncomePricingSystem(FIPS).Firstdayis7/1/02,lastdayis7/14/04
75Minutes
Phase2 March3,2003 AllInvestmentGradeTRACEeligiblebondsofatleast$100millionpar
value(originalissuesize)orgreaterratedAorhigher;and50Non
InvestmentGradebonds
75Minutes
FINRA120 April14,2003 120InvestmentGradeTRACEeligiblebondsratedBBB 75Minutes
n/a October1,2003 Allcurrentlydisseminatedbonds 45Minutes
Phase3A October1,2004 Allbondsthatarenoteligiblefordelayeddissemination(bondswith
ratingofBBBorhigher)
30Minutes
Phase3B February7,2005 Allbondspotentiallysubjecttodelayeddissemination(bondswith
ratingsBB+orlower)
30Minutes
n/a July1,2005 Allcurrentlydisseminatedbonds 15Minutes
n/a January9,2006 Allcurrentlydisseminatedbonds Immediate
Notes.InformationfromFINRApressreleasesavailableatfinra.org.Timetoreportistheamountoftimethedealerhasto
reportthetransactiontoFINRA.FINRAcollectedinformationonallTRACEeligiblesecuritiesonJuly1,2002.ATRACE
eligiblesecuritymeansallUSdollardenominateddebtsecuritiesthataredepositoryeligibleandregisteredbytheSEC,or
issuedpursuanttoSection4(2)oftheSecuritiesActof1933andpurchasedorsoldpursuedtoRule144a.FINRA
disseminatesthetransactionforBondsAffectedimmediatelyafterthereport,exceptforbondssubjecttodelayed
dissemination.Bondssubjecttodelayeddisseminationmustmeetcertaintrading,size,andratingcriteriadescribedby
Rule6250(b).
Phase1 Phase2 Phase3A Phase3B
(1) (2) (3) (4)
NumberofBonds 343 2,538 11,087 2,853
SizeatIssue($M)
mean 1,466 263 82 181
p10 1,000 100 1 8
p25 1,000 150 3 85
median 1,250 200 12 150
p75 1,750 300 75 232
p90 2,500 500 288 350
RatingatPhaseStart
mean A A+ A B
p10 AA AA AA BB+
p25 A+ A+ A BB
median A A+ A B
p75 BBB+ A BBB CCC
p90 BBB A BBB D
#whereratingisfromS&PRatingsXpress 331 2,191 7,733 2,274
#whereratingisfromFISD 12 345 3,319 489
FixedCouponRate
mean 6.7 6.9 5.8 9.0
median 6.8 6.9 5.9 8.8
numberfixedcoupon 309 2,155 10,149 2,632
MaturityatIssue(years)
mean 9.0 15.0 11.8 12.4
median 5.1 10.0 10.0 9.7
YearssinceIssue(atPhaseStart)
mean 1.9 5.5 3.4 5.9
median 1.5 5.1 1.9 5.7
Table2.BondCharacteristicsbyPhase
Notes.Bondissuesize,coupon,maturity,andissuedatecharacteristicsarefromFISD.Bondratingare
themostrecentratingbeforethePhasestarts.BondratingcharacteristicsarefromS&PRatingsXPress
database.IfratingsarenotavailableinS&PRatingsXpress,weuseratingsfromFISD.ToassignaFISD
rating,wefirstusetheS&Pvalueifitexists,otherwisetheMoodysvalue,otherwisetheFitchvalue,
andotherwisetheDuffandPhelpsvalue.Meanratingsarecomputedbyfirstconvertingeachratingto
anumber(AAA=1,AA+=2,AA=3,,andD=22)andthenconvertingthenumberbacktoaletterrating.
Before=After
Before After Before After Before After Before After zero nonzero
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Volume
Phase1(N=343) 11,445,643 4,251,581 7,828,097 13,986,145
Phase2(N=2,538) 888,352 844,458 57,250 52,459 319,339 299,180 950,000 844,361 51.4% 43.7% 4.9% 0.0%
Phase3A(N=11,087) 335,026 316,497 0 105 3,361 4,035 30,738 31,228 39.3% 43.9% 16.8% 0.0%
Phase3B(N=2,853) 366,526 213,035 0 0 3,818 0 357,000 91,475 45.1% 15.2% 39.7% 0.0%
Volume/IssueSize
Phase1(N=343) 0.76% 0.36% 0.59% 0.97%
Phase2(N=2,538) 0.28% 0.27% 0.03% 0.03% 0.15% 0.13% 0.35% 0.32% 51.4% 43.7% 4.9% 0.0%
Phase3A(N=11,087) 0.16% 0.16% 0.00% 0.00% 0.04% 0.05% 0.13% 0.15% 39.3% 43.9% 16.8% 0.0%
Phase3B(N=2,853) 0.18% 0.09% 0.00% 0.00% 0.01% 0.00% 0.23% 0.06% 45.1% 15.2% 39.7% 0.0%
PriceStandardDeviation
Phase1(N=340) 0.88 0.54 0.78 1.17
Phase2(N=2,023) 0.83 0.76 0.37 0.33 0.67 0.65 1.12 1.04 56.6% 43.2% 0.1% 0.0%
Phase3A(N=6,319) 0.78 0.68 0.35 0.31 0.65 0.57 1.09 0.95 59.6% 40.2% 0.2% 0.0%
Phase3B(N=1,129) 0.65 0.45 0.24 0.16 0.40 0.30 0.73 0.59 63.5% 36.1% 0.1% 0.3%
Notes.Averagedailyvolumeisaveragedoverallbonddaysineitherthe90calendardaysbeforeorafterthePhasestart.Ifabonddoesnottrade,itcontributeszerodaily
volumeforthatday.Averagedailyvolume/issuesizeistheaverageofdailyvolume/issuesizecalculatedinthesamemannerasaveragedailyvolume.Foraveragedailyprice
standarddeviation,thesampleofbondsisrestrictedtobondswherethereisatleastonedayinthe90daysbeforethePhasestartwithatleasttwotradesandthereisatleast
onedayinthe90daysafterthePhasestartwithatleasttwotrades.Aftercomputingthewithindaypricestandarddeviationforeachbondforalldayswithatleasttwotrades,
weaverageacrossthesedaysduringeitherthe90daysbeforeorafterthePhasestart.Reportedaveragedailypricestandarddeviationistheaverageacrossthesebonds.
ThereisnotransactioninformationforPhase1bondsinthe90daysbeforePhase1starts.NreferstothenumberofbondsthatchangedisseminationstatusinthePhase.In
column(9),Before>Afterreportsthefractionofbondswherethemeasuredoutcomeisgreaterinthe90daysbeforethePhasestartthaninthe90daysafter.Incolumn(10),
After>Beforerepresentsthereverseofcolumn(9).Incolumn(11),Before=After(zero)reportsthefractionofbondswherethemeasuredoutcomeisequaltozerobothbefore
andafter.Incolumn(12),Before=After(nonzero)reportsthefractionwherethemeasuredoutcomeisnonzeroandisequalbothbeforeandafter.
A.TradingActivity
B.PriceDispersion
Table3.TradingActivityandPriceDispersionforthe90DayWindowaroundPhaseStart
Percentiles WithinBondComparison
Mean 25th 50th 75th Before>
After
After>
Before
Table4.DifferenceinDifferenceEstimatesofTransparencyonTradingActivityandPriceDispersion
30days 60days 90days 30days 60days 90days
(1) (2) (3) (4) (5) (6) (7) (8)
A.Pooled
AllThreePhases 0.178 0.017** 0.020*** 0.027*** 0.901 0.090*** 0.095*** 0.077***
(0.008) (0.006) (0.005) (0.013) (0.010) (0.009)
9.6% 11.2% 15.2% 9.7% 10.4% 8.5%
Phase2 0.279 0.017 0.001 0.026** 0.953 0.099*** 0.090*** 0.070***
(0.015) (0.013) (0.011) (0.024) (0.017) (0.015)
6.1% 0.4% 9.3% 9.9% 9.4% 7.3%
Phase3A 0.156 0.011 0.005 0.003 0.903 0.057*** 0.071*** 0.058***
(0.013) (0.009) (0.007) (0.014) (0.010) (0.009)
7.1% 3.2% 1.9% 5.9% 7.8% 6.5%
Phase3B 0.179 0.082*** 0.074*** 0.074*** 0.679 0.167*** 0.198*** 0.168***
(0.011) (0.008) (0.008) (0.037) (0.035) (0.030)
45.8% 41.3% 41.3% 24.4% 28.7% 24.7%
H
0
:Phaseeffectsequal 0.000 0.000 0.000 0.011 0.002 0.003
#ofPhase2bonds 2,538 2,538 2,538 1,671 1,921 2,023
#ofPhase3Abonds 11,087 11,087 11,087 4,008 5,463 6,319
#ofPhase3Bbonds 2,853 2,853 2,853 797 1,028 1,129
#ofbonddays 1,155,677 2,313,806 3,410,347 183,214 376,174 557,057
*significantat10%;**significantat5%;***significantat1%
Notes.ThistablereportsestimatesofDisseminatexPostforvolume/issuesizeandpricestandarddeviation.PanelAreportsestimatesfromPhases2,3A,and3B
pooledtogether,whilepanelBreportsestimatesforeachPhaseseparately.RobuststandarderrorsclusteredbybondandPhaseareinparenthesisimmediately
belowtheestimates.MeanforDisseminatedisthe90dayaveragefornewlydisseminatedbondsimmediatelybeforethePhasestart.Thethirdentryineachrowis
thepercentageeffectascomputedbydividingtheestimatebytheMeanforDisseminated.PhaseeffectsequalreportspvaluesofteststhatthethreePhase
estimatesareequal.The30dayregressionsusetradesfrom30calendardaysbeforeandafterthePhasechange.The60and90dayregressionsaredefined
analogously.Forvolume/issuesize,thereare8,299Phase2,2,020Phase3A,and2,098Phase3Bcontrolbondsincolumns(2)(4).Forpricestandarddeviation,
thereare4,057Phase2,1,452Phase3A,and1,430Phase3Bcontrolbondsincolumn(6),5,057Phase2,1,681Phase3A,and1,587Phase3Bcontrolbondsincolumn
(7),and5,545Phase2,1,769Phase3A,and1,670Phase3Bcontrolbondsincolumn(8).
B.ByPhase
Volume/IssueSize(inpercent) PriceStandardDeviation
Estimate Estimate Meanfor
Disseminated
Meanfor
Disseminated
Estimatefrom
column(4)of
Table4
Withlinearand
quadratictrends
specificto
investmentgrade
foreachPhase
WithoutPhase1
bondsas
controls
Samplematched
onsize,credit
rating,timeto
maturity,and
yearssince
issuance
Estimatefrom
column(8)of
Table4
Withlinearand
quadratictrends
specificto
investmentgrade
foreachPhase
WithoutPhase1
bondsas
controls
Samplematched
onsize,credit
rating,timeto
maturity,and
yearssince
issuance
(1) (2) (3) (4) (5) (6) (7) (8)
AllThreePhases 0.027*** 0.013** 0.026*** 0.018** 0.077*** 0.075*** 0.080*** 0.077***
(0.005) (0.006) (0.005) (0.007) (0.009) (0.009) (0.010) (0.012)
Phase2 0.026** 0.017 0.028*** 0.014 0.070*** 0.086*** 0.073*** 0.079***
(0.011) (0.011) (0.011) (0.013) (0.015) (0.015) (0.017) (0.017)
Phase3A 0.003 0.007 0.007 0.014* 0.058*** 0.053*** 0.062*** 0.077***
(0.007) (0.007) (0.007) (0.008) (0.009) (0.009) (0.010) (0.016)
Phase3B 0.074*** 0.077*** 0.073*** 0.066*** 0.168*** 0.169*** 0.156*** 0.045
(0.008) (0.012) (0.008) (0.023) (0.030) (0.041) (0.031) (0.051)
H
0
:Phaseeffectsequal 0.000 0.000 0.000 0.096 0.003 0.006 0.015 0.825
#ofPhase2bonds 2,538 2,536 2,538 2,536 2,023 2,021 2,023 2,021
#ofPhase3Abonds 11,087 11,052 11,087 4,552 6,319 6,307 6,319 3,014
#ofPhase3Bbonds 2,853 2,763 2,853 808 1,129 1,111 1,129 325
#ofbonddays 3,410,347 3,379,514 3,314,283 1,867,658 557,057 556,024 478,817 430,962
*significantat10%;**significantat5%;***significantat1%
Table5.AlternativeSpecificationsforDifferenceinDifferenceRegressionsofTradingActivityandPriceDispersion
Volume/IssueSize(inpercent) PriceStandardDeviation
Notes.ThistablereportsestimatesofDisseminatexPostfromalternativeregressionspecifications.PanelAreportsestimatesfromPhases2,3A,and3Bpooledtogether,
whilepanelBreportsestimatesforeachPhaseseparately.RobuststandarderrorsclusteredbybondandPhaseareinparenthesisimmediatelybelowtheestimates.The
sampleincolumns(2),(4),(6),and(8)excludesunratedbonds.Modelswithtrendsincolumns(2)and(6)includelinearandquadraticfunctionsoftimeforinvestmentgrade
andhighyieldbondsspecifictoeachPhase.Thecharacteristicsusedtoconstructthematchedsampleincolumns(4)and(8)areissuesize,creditratingatPhasestart,timeto
maturityatPhasestart,andyearssinceissueatPhasestart.Wedividethesampleintofourissuesizequartiles,andtwogroupsfortheotherthreecharacteristics:investment
gradeandhighyield,andabove/belowthemediantimetomaturityandyearssinceissue.Weexcludebondsincellswith5orfewertreatedbondsor5orfewercontrol
bonds.PhaseeffectsequalreportspvaluesofteststhatthethreePhaseestimatesareequal.
A.Pooled
B.ByPhase
Table6.DifferenceinDifferenceEstimatesforAlternativeMeasuresofTradingActivity
Volume ProbabilityofTrade$1M
Meanfor
Disseminated Estimate
Meanfor
Disseminated Estimate
Meanfor
Disseminated Estimate
Meanfor
Disseminated Estimate
Meanfor
Disseminated Estimate
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
A.Pooled
AllThreePhases 420,725 72,439*** 0.197 0.002* 0.046 0.005*** 0.677 0.131*** 669,198 63,367***
(24,753) (0.001) (0.001) (0.039) (15,002)
17.2% 1.0% 10.9% 19.1% 9.5%
B.ByPhase
Phase2 888,352 33,792 0.383 0.018*** 0.088 0.007*** 1.344 0.016 782,646 4,854
(36,570) (0.002) (0.002) (0.047) (26,537)
3.8% 4.7% 8.0% 1.5% 0.6%
Phase3A 335,026 96,218** 0.177 0.015*** 0.036 0.001 0.625 0.056 535,926 38,038*
(46,086) (0.002) (0.002) (0.037) (19,645)
28.7% 9.0% 2.8% 9.5% 7.1%
Phase3B 366,526 98,344** 0.116 0.005* 0.052 0.012*** 0.298 0.487*** 1,205,940 344,005***
(45,222) (0.003) (0.002) (0.130) (33,039)
26.8% 4.3% 23.1% 163.3% 28.5%
H
0
:Phaseeffectsequal 0.428 0.000 0.000 0.001 0.000
#ofPhase2bonds 2,538 2,538 2,538 2,538 2,194
#ofPhase3Abonds 11,087 11,087 11,087 11,087 7,478
#ofPhase3Bbonds 2,853 2,853 2,853 2,853 1,320
#ofbonddays 3,410,347 3,410,347 3,410,347 3,410,347 831,000
*significantat10%;**significantat5%;***significantat1%
Notes.ThistablereportsestimatesofDisseminatexPostforalternativemeasuresoftradingactivityfollowingthe90dayestimatesinTable4.PanelAreportsestimatesfromPhases2,3A,
and3Bpooledtogether,whilepanelBreportsestimatesforeachPhaseseparately.RobuststandarderrorsclusteredbybondandPhaseareinparenthesisimmediatelybelowtheestimates.
Volumeisthetotaldailyparvalueofvolume,ProbabilityofTradeis1ifthebondtradesatallonthedayand0otherwise,ProbabilityofTrade $1Mis1ifthereisabondtradegreaterthan
orequalto$1Mand0otherwise,#ofTradesisthenumberoftradesperday,andAverageTradeSizeistheaveragesizeofthetradesinaday,conditionalontrading.Meanfordisseminated
isthe90dayaveragefornewlydisseminatedbondsimmediatelybeforethePhasestart.Percentageeffectsarecomputedbydividingtheestimatebythepriormean.Phaseeffectsequal
reportspvaluesofteststhatthethreePhaseestimatesareequal.Forthefirstfouroutcomes,thereare8,299controlbondsinPhase2,2,202controlbondsinPhase3A,2,098control
bondsinPhase3B.ForAverageTradeSize,thereare6,206controlbondsinPhase2,1,876controlbondsinPhase3A,and1,785controlbondsinPhase3B.
ProbabilityofTrade #ofTrades AverageTradeSize
Table7.DifferenceinDifferenceEstimatesforAlternativeMeasureofPriceDispersion
10DayPriceStandard
Deviation
30DayPriceStandard
Deviation
Meanfor
Disseminated Estimate
Meanfor
Disseminated Estimate
Meanfor
Disseminated Estimate
(1) (2) (3) (4) (5) (6)
A.Pooled
AllThreePhases 1.914 0.182*** 1.154 0.100*** 1.354 0.140***
(0.022) (0.013) (0.019)
9.5% 8.7% 10.3%
B.ByPhase
Phase2 2.031 0.172*** 1.300 0.082*** 1.564 0.104***
(0.036) (0.025) (0.037)
8.5% 6.3% 6.6%
Phase3A 1.921 0.132*** 1.133 0.112*** 1.295 0.145***
(0.023) (0.011) (0.014)
6.9% 9.9% 11.2%
Phase3B 1.386 0.397*** 0.943 0.116*** 1.283 0.214***
(0.095) (0.032) (0.045)
28.6% 12.3% 16.7%
H
0
:Phaseeffectsequal
0.020 0.529 0.172
#ofPhase2bonds 2,023 2,083 2,103
#ofPhase3Abonds 6,319 6,788 6,951
#ofPhase3Bbonds 1,129 1,172 1,201
#ofobservations 557,057 220,538 112,084
*significantat10%;**significantat5%;***significantat1%
AbsoluteSpread
Notes.ThistablereportsestimatesofDisseminatexPostforalternativemeasuresofpricedispersionfollowingthe90
dayestimatesinTable4.PanelAreportsestimatesfromPhases2,3A,and3Bpooledtogether,whilepanelBreports
estimatesforeachPhaseseparately.RobuststandarderrorsclusteredbybondandPhaseareinparenthesis
immediatelybelowtheestimates.AbsoluteSpreadisthemaximumpriceminusminimumpricetradedforabondina
day,PriceStandardDeviationover10Daysisthestandarddeviationofpricesforalltradesoccuringin10daybins,and
PriceStandardDeviationover30Daysisthestandarddeviationofpricesforalltradesoccuringin30daybins.Meanfor
disseminatedisthe90dayaveragefornewlydisseminatedbondsimmediatelybeforethePhasestart.Percentage
effectsarecomputedbydividingtheestimatebythepriormean.
IssueSize<
$100M
IssueSize
$100M
IssueSize<
$100M
IssueSize
$100M
(1) (2) (3) (4) (5) (6) (7) (8)
AllThreePhases 0.013** 0.057*** 0.005 0.038*** 0.010 0.028*** 0.071*** 0.056***
(0.006) (0.011) (0.006) (0.006) (0.007) (0.007) (0.017) (0.012)
H
0
:Effectsequalbetween
(1)(2) (3)(4) (5)(6) (7)(8)
pvalue 0.001 0.001 0.002 0.488
(5)(7) (6)(8)
0.000 0.049
#newlydisseminatedPhase2 2,536 0 10 2,526 10 2,526 0 0
#newlydisseminatedPhase3A 10,418 634 8,410 2,642 8,382 2,036 28 606
#newlydisseminatedPhase3B 233 2,530 677 2,086 81 152 596 1,934
#ofbonddays 3,011,573 1,826,801 2,530,591 2,307,783 2,458,151 2,011,931 1,530,949 1,754,361
AllThreePhases 0.058*** 0.124*** 0.053*** 0.084*** 0.048*** 0.068*** 0.170*** 0.122***
(0.009) (0.017) (0.010) (0.010) (0.010) (0.011) (0.059) (0.017)
H
0
:Effectsequalbetween
(1)(2) (3)(4) (5)(6) (7)(8)
pvalue 0.006 0.023 0.169 0.442
(5)(7) (6)(8)
0.042 0.008
#ofPhase2bonds 2,021 0 6 2,015 6 2,015 0 0
#ofPhase3Abonds 5,695 612 4,175 2,132 4,154 1,541 21 591
#ofPhase3Bbonds 90 1,021 104 1,007 6 84 98 923
#ofbonddays 503,844 373,258 385,712 491,390 383,887 440,940 322,808 371,433
*significantat10%;**significantat5%;***significantat1%
Notes.ThistablereportsestimatesofDisseminatexPostfor90daysbycreditandissuesizecategoriespoolingtogetherPhases2,3A,and3B.Bondsthatareunratedare
excluded.Standarderrorsclusteredbybondareinparentheses.InPanelA,thereare8,165controlbondsinPhase2,2,202controlbondsinPhase3A,2,098control
bondsinPhase3B.InPanelB,thereare5,512controlbondsinPhase2,1,769controlbondsinPhase3A,and1,670controlbondsinPhase3B.Pvaluesreportedfrom
ChiSquaretestsforequalityofestimatesbetweenspecifications.
B.DailyPriceStandardDeviation
Table8.DifferenceinDifferenceEstimatesbyCreditRatingandIssueSize
Investment
Grade HighYield
IssueSize<
$100M
IssueSize
$100M
Investmentgrade Highyield
A.Volume/IssueSize
90DayMedian Before=After
Before After Before After zero nonzero
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Volume/IssueSize
Phase1(N=334) 0.06%
0.06%
0 0 51.50% 44.00% 4.50% 0.0% 0.001
(0.004)
Phase2(N=2,294) 0.05%
0.04%
0 0 44.10% 35.30% 20.70% 0.0% 0.003
(0.003)
Phase3A(N=4,983) 0.02%
0.02%
0 0 24.60% 25.30% 50.10% 0.0% 0.001
(0.002)
Phase3B(n=2,319) 0.01% 0.01% 0 0 21.30% 15.70% 63.00% 0.0% 0.003*
(0.002)
DailyPriceStandardDeviation(ungrouped)
Phase1(N=253) 0.22 0.26 0.10 0.12 36.0% 59.0% 5.0%
0.0%
0.092
(0.089)
Phase2(N=392) 0.17 0.26 0.13 0.23 45.0% 36.0% 20.0%
0.0%
0.163
(0.121)
Phase3A(N=464) 0.21 0.39 0.19 0.33 35.0% 35.0% 30.0%
0.0%
0.026
(0.144)
Phase3B(N=109) 0.23 0.04 0.19 0.04 32.0% 25.0% 43.0%
0.0%
0.267*
(0.144)
DailyPriceStandardDeviation(grouped)
Phase1(N=213) 0.36 0.42 0.26 0.27 35.0% 65.0% 0.0%
0.0%
0.146
(0.163)
Phase2(N=261) 0.24 0.40 0.21 0.37 47.0% 46.0% 8.0%
0.0%
0.259
(0.233)
Phase3A(N=273) 0.43 0.70 0.40 0.67 49.0% 37.0% 14.0% 0.0%
0.202
(0.267)
Phase3B(N=65) 0.38 0.04 0.31 0.04 45.0% 25.0% 31.0% 0.0%
0.492*
(0.280)
*significantat10%;**significantat5%;***significantat1%
B.PriceDispersion
A.TradingActivity
Table9.NAICTradingActivityandPriceDispersionforthe90DayWindowaroundPhaseStart
90DayMean Before>
After
After>
Before
Differencein
DifferenceEstimate
Notes.Thistablereports90daybeforeandaftercomparisonsoftradingactivityandpricedispersionusingdatafromtheNationalAssociationofInsurance
Commissioners(NAIC).Averagedailyvolumeisaveragedoverallbonddaysineitherthe90calendardaysbeforeorafterthePhasestart.Ifabonddoesnottrade,
itcontributeszerodailyvolumeforthatday.Foraveragedailypricestandarddeviation,thesampleofbondsisrestrictedtobondswherethereisatleastonedayin
the90daysbeforethephasestartwithatleasttwotradesandthereisatleastonedayinthe90daysafterthephasestartwithatleasttwotrades.After
computingthewithindaypricestandarddeviationforeachbondforalldayswithatleasttwotrades,weaverageacrossthesedaysduringeitherthe90daysbefore
orafterthephasestart.Reportedaveragedailypricestandarddeviationistheaverageacrossthesebonds.Ungroupedpricestandarddeviationdoesnotcombine
tradesintoasingleobservation,whilegroupedpricestandarddeviationisbasedoncombinedtradestodealwithsplitreportingissuesdescribedinthedata
appendix.Column(9)reportsestimatesoftheDisseminatexPostindifferenceindifferenceregressionsfor90days,whichparallelthosereportedinTable4.
NreferstothenumberofbondsthatchangedisseminationstatusinthePhase.
Table10.EstimatesofTransparencyEffectsonNAICDealerMarketSharefor12WeekWindowaroundPhaseStart
ParVolume($M) NumberofTrades
WeeklyAverage
Before Estimate
WeeklyAverage
Before Estimate
Top4
Dealers
Top8
Dealers
Top4
Dealers
Top8
Dealers
Top4
Dealers
Top8
Dealers
Top4
Dealers
Top8
Dealers
(1) (2) (3) (4) (5) (6) (7) (8)
A.Pooled
AllFourPhases 87.59 81.87 13.36*** 12.74*** 35.04 33.97 3.08*** 2.87***
(4.97) (3.37) (0.96) (0.792)
15.3% 15.6% 8.8% 8.4%
B.ByPhase
Phase1 112.64 115.13 28.06*** 20.22** 40.46 41.88 6.20*** 4.28**
(8.19) (8.88) (1.92) (1.82)
24.9% 17.6% 15.3% 10.2%
Phase2 98.50 92.02 2.648 5.283 41.06 38.57 3.66** 1.84
(12.56) (7.41) (1.66) (1.47)
2.7% 5.7% 8.9% 4.8%
Phase3A 126.88 108.31 20.09*** 22.40*** 49.52 46.20 1.04 4.39**
(7.64) (4.22) (1.95) (1.85)
15.8% 20.7% 2.1% 9.5%
Phase3B 12.34 12.04 2.66** 3.07*** 9.13 9.22 1.43** 0.97*
(1.27) (0.87) (0.72) (0.50)
21.5% 25.5% 15.7% 10.5%
H
0
:Phaseeffectsequal
0.003 0 0.090 0.120
#ofPhase1counterparties 79 79 79 79
#ofPhase2counterparties 81 81 81 81
#ofPhase3Acounterparties
84 84 84 84
#ofPhase3Bcounterparties
83 83 83 83
#ofcounterpartyweeks 7,848 7,848 7,848 7,848
*significantat10%;**significantat5%;***significantat1%
Notes.ThistablereportsestimatesofDisseminatexPostforparvolumeandthenumberoftradesforcounterpartiesinthe
NAICdatabaseinadifferenceindifferenceregressionfollowingTable4.PanelAreportsestimatesfromPhases2,3A,and
3Bpooledtogether,whilepanelBreportsestimatesforeachPhaseseparately.Robuststandarderrorsclusteredbybond
andPhaseareinparenthesisimmediatelybelowtheestimates.Top4and8dealersarecomputedbasedonrankingsof
dealersofthetotalparvolumeofalltradesbetween20002001.Thedealersinthetop4and8areidenticaliftherankingis
basedonnumberoftradesbetween20002001.Thetimeperiodis12weeksbeforeandafterdissemination.
Counterpartiesrepresent87compositecounterpartiesconstructedfromtheNAICdataset.Eachdependentvariableisa
counterpartyweek,correspondingtoallofthetradeswiththecounterpartyamongbondsinthePhasefortheweek.
Weeklyaveragebeforecorrespondstothe12weekaverageforparvolumeornumberoftradesforcounterparties
immediatelybeforethePhasestart.Percentageeffectsarecomputedbydividingtheestimatebythepriormean.

A. TRACEDataAppendix
TheTRACEdatasetweusewaspurchaseddirectlyfromFINRA.Werefertothisdataasthe
HistoricalFINRATRACEdatasetsinceitcontainsbothdisseminatedandnondisseminatedtrades,
indicatedbytheDisseminationFlagfield(DISSEM_FL).TherearealsotwoTRACEdatasetsavailableon
WRDS,onefromFINRAandoneprovidedbyMergentFISD.Thesedatabasesonlycontaindisseminated
traderecordsthatwereavailabletomarketparticipantsinrealtimeanddonotcontainanynon
disseminatedtrades.
TheHistoricalFINRATRACEdatasetcontains35,284,669uniquetraderecords,on35,695
differentCUSIPS,forJuly1,2002untilDecember31,2006.AllFINRAtraderecordsareselfreportedby
FINRAmembers.Toeachselfreportedtransactionreport,FINRAaddsthetimeanddatethatit
receivedthereportandaflagindicatingwhetherornotthereportwasdisseminatedtothepublic.
Then,FINRAgeneratesamessagesequencenumberthatisuniquewithinthereportingday.For
transactionsthataremodifiesorcancels,themessagesequencenumberoftheoriginaltradeisincluded
asaseparatefieldcalledtheoriginalmessagesequencenumber.
WefirsttaketheHistoricalFINRATRACEdatasetandmatchittotheuniverseofcorporate
bondsintheMergentFISDdatabase,oursourceforbondcharacteristicssuchasissuesize,ratings,
maturity,etc.WedropallTRACEbondsthatdonotmatchtoFISD.Wealsodropallbondswithequity
likecharacteristics(convertibles,exchangeables,etc.)sincetheirequitycomponentmaybeincludedin
thebondprice.WenextdropallRule144abondsbecauseTRACEdoesnotreporttradinginformation
onthesebonds.Finally,FISDdoesnotreportthecorrectissuesizeinallcases.Forexample,thereare
somebondswithareportedissuesizeof$0.Afterhandcheckinganumberofcaseswithsmallissue
size,wedecidedtodropallbondswithreportedFISDissuesizeoflessthan$100,000,includingthose
withissuesizeof$0.ThenumberoftradeseliminatedandtheircorrespondingCUSIPsaffectedbythese
stepsareshowninfirstsectionofTableA1.
FINRAreportspricesonbondtradesdifferentlyforprincipalandagencytrades,denotedbythe
BuyerCapacityfield(BUY_CPCTY_CD)orSellerCapacityfield(SELL_CPCTY_CD).Pricesreportedon
principaltradesincludeanymarkupsormarkdowns.Pricesreportedonagencytradesdonotinclude
thecommissionchargedsincecommissionisreportedinaseparatefield.(TRACEUSERGuide,version
2.2,page17)Tomakeourpricescomparableacrossalltrades,weadjusttradepricesforthe
commissionpaidwheneverthebuyorsellcommissionfieldisnonempty.Atotalof699,833trades
representing19,999CUSIPsaremodified.
Notallremainingtraderecordsareuniqueorcorrect.Weeliminatetraderecordsforfourmain
reasons.First,sometradesdonottakeplace;theyarelatermodified,revised,orcancelled.Second,
sometradesarereportedmorethanonce.Third,sometraderecordshaveerroneouspriceorvolume
data.Fourth,sometradeshaveproblemswiththeirtradedate.TableA1reportsthenumberoftrade
recordsaffectedforeachofthesereasons.

TRACEgeneratesextratraderecordsformodified,cancelled,orreversedtrades.Trades
cancelledwithinadayaremarkedascancelled,whiletradescancelledonsubsequentdaysaremarked
asreversals.Whenidentifyingtradesthataresubsequentlymodified,cancelledorreversed,werelyon
threedatafields:TradeStatus(TRC_ST),MessageSequenceNumber(MSG_SEQ_NB),andOriginal
MessageSequenceNumber(ORIG_MSG_SEQ_NB).Thefirstfield,TradeStatus,hasavalueofWifthe
traderecordisamodificationandCifitisacancellationofanothertraderecordreceivedbyFINRAon
thesamereportingday.Ifthetraderecordisnotacancellationoramodification,TradeStatushasa
valueofT.Foreachreportingday,FINRAassignseverytradereportauniqueMessageSequence
Number.Thethirdfield,OriginalMessageSequenceNumber,isblankunlessthetradeisacancellation
ormodification.Inthoseinstances,theOriginalMessageSequenceNumberfieldcontainstheMessage
SequenceNumberofthetraderecordthatisbeingcancelledormodified.
WelinktogethertheOriginalMessageSequenceNumbersandtheMessageSequenceNumbers
tocreatechainsoftraderecords,ifsuchchainsexist.Eachchainstartswiththeoriginaltradeandends
withthelastmodifiedorcancelledtrade.Theexistenceofachainmeansthatsometradeswillbe
eliminated.Forexample,ifatradethatisreportedwithmessagesequencenumber1ismodifiedina
recordwithmessagesequencenumber2andthenlatermodifiedinarecordwithmessagesequence
number3,weeliminatethefirsttworecords.Welinkthesethreerecordstogether,startingfrom
record3andmovingbackwardsuntilwereacharecordwiththeoriginalmessagesequencenumber
(theoriginaltrade).Inasimilarmanner,ifatradeislatercanceled,welinkthecanceledtraderecord
withtheoriginaltraderecordandeliminatebothtraderecordsfromoursample.Sinceitispossiblefor
differenttradesinachaintohavedifferentdisseminationstatuses,wetreattheterminaltraderecordin
achainasdisseminatedifanytraderecordinthechainwasdisseminated.Ifatradeismodified,we
removeallrecordsexceptthelastoneinthechain.Forcancelledtrades,weeliminatetheentirechain
oftrades.Whenacancelledtradecannotbematchedtotheoriginaltrade,italoneiseliminated.
TradereversalsareidentifiedbytheAsOfIndicatorfield(ASOF_CD)byR.Reversalscannot
betrackedusingMessageSequenceNumberandOriginalMessageSequenceNumberbecausethe
originaltradeanditsreversalarereportedtoFINRAondifferentdays.MessageSequenceNumbersare
uniquewithineachreportingdayandcannotbelinkedacrossdays.Therefore,tolinkareversaltoits
originaltrade,wematchbasedonsevenidentifyingcharacteristics:CUSIP,executiondate,execution
time,price,volume,indicatorforbuyerorseller,andindicatorfordealerorcustomer.Matcheswith
thesecriteriarepresentasevenwaymatch.
Usingtheseseventradecharacteristics,however,oftenleadstoamanytomanymatch;thatis,
thereisoftenmorethanonepossiblepairing.(Infact,itappearsthatmanyreversalsaretheresultofa
tradebeingenteredtwiceandthesecondrecordbeingreversed).Aftermatchingreversalandnon
reversalreportsusingtheseseventradecharacteristics,weeliminatetheminimumnumberofexact
matches.Ifthereisonlyoneexactmatch,boththereversalanditsmatchedtradeareeliminated.If
thereismorethanoneexactmatch,weeliminatethereversaltradeandoneofthematchingtrades.
Since,bydefinition,thetradesoccuratthesametime,date,price,andvolume,thesecharacteristicsare
unaffectedbythechoiceofwhichmatchingtradeweeliminate.Forexample,ifthereare4reversals

and5nonreversals,wedropthe4reversalsanddropthefirst4nonreversals.Atotalof837,740trade
recordsweredroppedaspartofreversals.
Unfortunately,notallreversalshaveanexactsevenwaymatch.Alargenumberofthe
unmatchedreversalshadasixwaymatchtoanothertradeifwedropthesameexecutiontime
requirement.Sinceexecutiontimeisselfreported,weassumethesesixwaymatchesweretheoriginal
tradesthatweremeanttobereversed,andweeliminatethereversalandthematchedtradefromthe
samplefollowingthestepsabove.Evenaftersixwaymatches,thereare44,849recordslabeledas
reversalsthatwewereunabletomatchtoanoriginaltrade.Wedroppedthesereversalsfromthe
dataset,butwereunabletoidentifytheoriginalmatchedtrade.Inaddition,theAsOfCodefieldcan
alsotakeonthevaluesXcorrespondingtodelayedreversalandDcorrespondingtodelayed
dissemination.Wedroptheserecordsaswell.
Aftereliminatingmodified,cancelled,andreversedrecords(whichrepresenttradesthatdonot
actuallytakeplace),wenextdealwithtradesthattakeplace,butarereportedmorethanonce.There
aretwowaysforduplicaterecordstooccurintheHistoricalTracedatabase.Thefirstinvolves
transactionsbetweentwodealers,whobothreportthetradetoFINRA,oneasabuytradeandoneasa
selltrade.BoththebuyandsellsideofinterdealertradesareincludedintheHistoricalTRACEdatabase
releasedbyFINRA.IntheMergentFISDTRACEdatasetonWRDS,onlythesellersreportofaninter
dealertradeisincluded.Tomimicthisconvention,weeliminatetraderecordsforinterdealertrades
submittedbythebuyingdealer.Wedropatotalof6,578,859traderecordswherethetransactionis
labeledasabuy(usingtheBuy/SellIndicator,RPT_SIDE_CD)andwherethetransactionisassociated
withaduplicateselltransaction.Inaddition,boththebuyandsellrecordsmustbelabeledasinter
dealertrades(usingtheContraPartyIndicator,CNTRA_MP_ID).
AsshowninTableA1,ofthe6,578,859dealerbuyrecordsweeliminated,590,372correspond
tosellrecordswiththesameCUSIP,date,price,quantity,interdealertradeindicator,andexecution
time.Anadditional4,468,884buyrecordscorrespondtosellrecordsthathavethesameCUSIP,date,
price,quantity,interdealertradeindicator,butadifferentexecutiontime.Asmentionedearlier,
executiontimeisselfreportedbyboththebuyerandsellerandwebelievethattwotradeswhichhave
amatchofallothercharacteristicsotherthantimeareprobablyduplicates.Finally,1,519,603dealer
buyrecordscannotbematchedtoadealersellrecord.Theserecordsareapuzzlegiventhatwehave
norecordofasellerreportingthetradeinaninterdealertransaction.Tobeconservative,weeliminate
theseremainingunmatchedinterdealerbuyrecords.
Thesecondwayduplicatetradesappearinthedatabaseiswhenthedealeractsasinanagent
capacity.Ifadealeractsasanagentforacustomer,FINRAasksthattradebereportedasiftheagent
stoodbetweenthecustomerandthecontraparty(TRACEUSERGuide,version2.2,page21).Thatis,
ifadealersoldbondsasanagentfortheircustomertoanotherparty,theywouldreporttworecordsto
TRACE:abuytransactionfromthecustomerandaselltransactiontotheotherparty,eventhoughthisis
asingletransaction.Wekeeponlytheselltransactionwhenthereisbothanagencybuytransaction

andagencyselltransactionwiththesameprice,quantity,executiondate,andexecutiontime.This
ruleleadsustodrop563,658traderecords.
Anotherreasonweeliminatetradesfromthedatasetisthatpriceorvolumeinformation
appearserroneous.Since,asmentionedabove,alltradesareselfreported,dataentryerrorsare
possibleeventhoughFINRAmonitorsreportedtrades.Wedeleterecordswithmissingtradeprices.We
alsodroptraderecordswithunreasonablylargeprices.Tocomputeourdefinitionofunreasonable
largeprices,wefirstcalculatedthemaximumriskfreepriceofeachbondinthesample.The
maximumriskfreepriceduringourtimeperiodisthemaximumpresentvalueoffuturecouponand
principalpayments,discountedusingthelowesttreasuryrateobservedacrossallbondsandalldays
betweenJuly1,2002andDecember31,2006.Acrossallthebondsinoursample,themaximumriskfree
priceis$214.Tobeconservative,wedropallbondtradesthattakeplaceatpricehigherthan$220.We
alsoeliminated4,597tradeswherethevolumeofasingletradewashigherthan50%oftheissue
amount.
40
Finally,weeliminatedtradeswherethevolumewasreportedaslessthan$1,000.
Thelastreasonwedroprecordsistradetimingissues.Wedropanytradethatoccursbeforeits
offeringdateorafteritsmaturitydate.Wealsodropanytradethatwasreportedlyexecutedona
differentdaythanitwasreported.Finally,wedropallrecordsthatarereportedtohaveoccurredon
SIFMAholidays.Aftertheseeliminations,weareleftwith21,149,525tradesinvolving30,643CUSIPs.
Theentiredatasetofcleanedbondsisnotnecessarilyusefulhowevertoevaluatetheeffectof
TRACE.Ourempiricalstrategyisbasedoncomparingabondstradingbehaviorwhenitchangesfrom
nondisseminatedtodisseminated.Manybondswillbedisseminatedfortheirentiretradinghistory.
TheseincludebondsthatbelongtoaFINRAPhasethatareissuedafterthebeginningofthePhasedate,
andbondsthatmaybeissuedbeforeaPhasebeginsbutonlytradeafterthedisseminationchangedate
forthatPhase.Therearealsobondsthatarealwaysnondisseminated.Thesearebondsthatmay
maturebeforethebeginningoftheirPhasedateaswellasbondsthatbelongtoaPhasebutnevertrade
afterthePhasebegins.
TableA2outlinesthestepsfromHistoricalCleanedSampleinTableA1totheCleanedPhase
sample,thesampleofbondswhichexistandhavezeroornondisseminatedtradingbeforethestartofa
PhaseandzeroordisseminatedtradingafterthestartofaPhase.WebeginwithalistofallPhase1,2,
3Aand3Bbonds.Thereare26,955bondsinthislist,ofwhich20,595existintheCleanedHistorical
TRACESample.Theyhave17,434,020tradesduringoursampleperiod.Thus,abouttwothirdsofthe
bondsinourCleanedHistoricalTRACESampleareinourPhaselist,butthisrepresents82.4%ofthe
trades.

40
ThismayrepresentadataerrorinFISDissuesize.Forexample,about2600oftheeliminatedrecords
correspondtoonecompanyAlestra,whichwentthroughanexchange.FISDreportsitsissuesizeas$83,000,but
throughpressreleaseswedetermineditwasatleast$400,000,000.AnotherexampleisCountrywideCCR.MQ.

WeobtainedPhases2,3A,and3BfromFINRA.FINRAprovideduswithalistofbondsthat
beganbeingdisseminatedatthestartofeachofthethreePhases.Thislistwasprovidedinanon
electronicformatwherebondswereidentifiedwithtickersymbols.Unfortunately,manytickersymbols
longerthansixcharactersweretruncated.Thiswasaproblemforfirmswithafourcharactercompany
tickersymbolwhichalsoissuedbondswiththreecharactersecuritytickers.Inparticular,manyGMAC
bondsweretruncated.SinceFINRAalsoprovideduswithcouponandmaturitydatesforeachbond,we
wereabletohandmatchmanyofthetruncatedtickersymbols,butnotall.ThelistofPhase1bonds
wasnotprovidedbyFINRA,andwegenerateditourselvesgiventhecriterialistedbyTRACEforPhase1
bonds.Thatis,inadditiontoexistingbeforethebeginningofPhase1,bondshadtobeinvestment
gradeandhaveaninitialissuesizeof$1billionorgreater.Afterdeterminingthesetofbondsmeeting
thesecriteria,weeliminatedallbondsthatareontheFINRAlistsforPhases2,3Aor3Bandthebond
hadtohaveadisseminatedtradebeforethebeginningofPhase2.
InadditiontothefourPhasesthatcorrespondtotheFINRAdisseminationdates,FINRAalso
maintainedtwootherlistsofbonds,whichwecalltheFINRA50andtheFINRA120.TheFINRA50
represent50NonInvestmentGrade(HighYield)securitiesdisseminatedunderFixedIncomePricing
System(FIPS2).Thislistof50bondschangesovertimewithbondsbothenteringandexiting.FINRA
listsallofthesebondsontheirwebsiteandtherewereatotalof149bondsthatwereintheFINRA50at
somepointduringitsexistencefromJuly1,2002untilJuly14,2004.TheFINRA120listisaspecialsetof
120investmentgraderatedBaa/BBBthatFINRAdelayedPhase2disseminationfor.Phase2
disseminationstartedonMarch3,2003forPhase2bonds,butstartedonApril14,2003forthe
FINRA120.ThisspecialsamplewascreatedsothatFINRAcouldconductacontrolledexperimentto
studytheeffectsofdisseminationinPhase2,containedinGoldstein,Hotchkiss,andSirri(2007).
TableA2explainshowwewentfromFINRAslistofPhase2,3A,and3Bbonds,andourlistof
Phase1bonds,toourcleanedPhasesamples.ForeachPhaselist,weonlyusebondsthatexistinour
CleanedHistoricalTRACESample.SomebondsontheFINRAlistsdidnottradeduringoursampleperiod
andthusarenotintheHistoricalTRACEsample.Thisisshownbetweenlines1and2underPhases2,
3A,and3B.
WenexteliminateanybondsthatalsoexistintheFINRA50orFINRA120list.Followingthis,we
eliminatebondsthatdonotexist(i.e.,werenotissuedormatured)duringtheperiod90daysbefore
until90daysafterthestartofthePhase.Finally,wedroppedsomebondswithdataproblems.There
areafewbondswhereFINRAreportdisseminatedtradesbeforethestartofthePhase,ornon
disseminatedtradesafterstartofPhase.AfterapplyingthesestepsforeachPhaselist,whatremainsis
ourcleanedsamplebyPhases.Thereareatotalof16,825bondsinourtotalcleanedPhasesample
representing14,210,328tradesduringourtimeperiod.

B.NAICDataAppendix
TheNationalAssociationofInsuranceCompanies(NAIC)datasetweuseisfromMergentFISD
availableonWRDS.TheNAICrequiresinsurancecompaniestoselfreportallsecuritiestransactionsin
theirfinancialstatements.Thereare63,859bondswith1,933,095reportedtransactionsintheNAICfile
overtheperiodJanuary1,2000untilDecember31,2006.ScheduleDoftheannualNAICfilingsrequire
insurerstoreportallbondtransactionsinoneofthreecategories:bondsaddedtotheportfolioduring
thecalendaryearandheldthroughtheendoftheyear,bondsdeletedfromtheportfolioduringthe
calendaryearthatwerenotaddedinthesameyear,andbondsaddedanddeletedinthesamecalendar
year.Foreachtransaction,thedatabaserecordstheCUSIP,date,parvalueofthetransaction,theactual
valueofthetransaction,ifitwasanadditionordeletion,andafieldforthecounterpartyinvolvedinthe
transaction.Pricesarenotreportedbutcanbecomputedfromtheratioofthevaluereceivedinthe
transactiontotheparvalueofthebondsinthetransaction.Importantly,thenamesoftheinsurance
companiesinvolvedinthetransactionsareexcludedfromthedata.
TomaketheNAICanalysiscomparabletotheTRACEanalysis,wefirstmatchoursampleofNAIC
bondswiththeCleanedHistoricalTRACEsamplebyCUSIP.Theuniverseofbondswhichinsurance
companiestradeismuchlargerthanthatreportedbyFINRA.45,902NAICbondsrepresenting804,685
reportedtransactionsarenotincludedinourCleanedHistoricalTRACEsampleandareeliminated.
TableB1reportsthenumberoftransactionsandCUSIPseliminatedbythisstep.
Nextweeliminatereportedtransactionsthatarenotconnectedtotrades.TheNAICdatabase
containsalltransactionsinvolvinginsurancecompaniesbondportfolios,notonlybuyandsell
transactions,butalsoothertransactionssuchasbondcallsandmaturities.Thetypeoftransactionis
codedinthecounterpartyfield.Weeliminatealltransactionsthatchangebondportfolioholdingsthat
arenotbuysorsells.Theseincludethefollowingcodes:CALL,CANCEL,CONVERT,EXCHANGE,ISSUE,
MATURE,PUT,REDEEM,SINKINGFUND,TAXFREEEXCHANGE,TENDER,TRANSFER,PAYDOWN,and
REPLACE.
Therearetwoprevalententriesinthecounterpartyfieldcomprisingalmost15%ofthecleaned
databasethatrequiredadditionalattention:DIRECTandVARIOUS.DIRECTmayindicateadirect
placement,similartoanunderwriting,oritmayindicatethenameofacounterpartyinanactualtrade.
VARIOUSissimplyanambiguouscatchall,wheresomerecordsmaybeactualtradesandsomearenot.
TocheckwhetherDIRECTandVARIOUSrepresentactualtrades,wematchedtheseNAICrecordsto
TRACEusingtheCUSIP,price,volume,anddateofthetransaction.ForDIRECT,onlyabout3%of
transactionsmatchintotheTRACEdataset,whileforVARIOUSonlyabout1%oftransactionsmatch.
BecauseoftheproblemsidentifyingwhichoftheDIRECTorVARIOUStransactionsareactualtrades,we
eliminatethemalongwiththeothercodeslistedabovethatarenotbuysandsells.AsshowninTable
B1,allsuchfilterseliminate290,998reportedtransactionson14,095differentbonds.
Weeliminateasmallnumberoftradeswithdataissues,i.e.missingprices,negativeprices,etc.
Wenexteliminatetradeswithtimingissues,i.e.,tradesthatareexecutedbeforeoronthebonds

offeringorafteroronthebondsmaturitydate.AlargefractionofNAICtransactionstakeplaceonthe
offeringandmaturitydates.Webelievethatthisisbecauseinsurancecompaniesarelargecustomersof
bondofferingsandpurchasethebondsatthistime.TheNAICrulesrequireitsmemberstolistthese
purchasesasatransactionsincethebondsareaddedtotheirportfolio.Sincethesetransactionsare
probablypartoftheunderwriting,wedonotincludethemastrades.Ifaninsurancecompanyholdsthe
bonduntilitsmaturity,thattransactionwillalsoberecordedbyNAIC.Finally,wealsoexclude
transactionslistedonbondholidays.ThesescreensshowninTableB1aresimilartothoseappliedtothe
TRACEdatasetinTableA1.
Afterthescreensandmatching,thereare16,006bondsand693,862reportedtransactions
(whichwebelievetobebuysandsells)inourcleanNAICsample.Importantly,theNAICtimeperiodin
TableB1isthirtymonthslongerthantheTRACEtimeperiodinTableA1.Whenwerestricttothetime
periodJuly1,2002untilDecember31,2006,thereare14,574bondsand481,135transactions,as
showninthelastthreecolumnsofTableB1.
AsmentionedaboveinSectionVII,webelievethatmanytradesinTRACEaredisaggregatedby
theNAICreportingprocess.WhencomparingtheNAICandTRACEdatabases,therearemultipleNAIC
transactionsthatmatchtoasingleTRACEtradeusingCUSIP,date,priceandcounterparty,butnot
volume.However,ifwegroupNAICtransactionsbyCUSIP,date,priceandcounterpartyintoasingle
recordwithacombinedvolume,manyofthesegroupedNAICtradesmatchtoacorrespondingsingle
tradeinTRACE.
TherearetworeasonsthattradesaredisaggregatedinNAIC.ThefirstreasonishowNAIC
requirestransactionstobereportedonScheduleDoftheannualNAICfiling.Insurersmustseparately
reportbondspurchasedandsoldinthesameyearfrombondspurchasedandheldthroughtheendof
theyear.Thismeansifaninsurancecompanypurchases$1millionparofabondonJanuary1,2001
andsells$500,000ofthisbeforeDecember31,2001andtheremaining$500,000sometimeinthe
followingyear,underNAICreportinginstructions,thissinglepurchasewouldbesplitintotwoseparate
purchasesof$500,000each,reportedintwodifferentsectionsofScheduleD.One$500,000purchase
wouldbereportedinthelongtermpurchasereportingsection,andone$500,000purchasewouldbe
reportedintheshorttermholdingsection.
WhentheNAICdatabaseiscompiled,theabovetradewouldappearastwopurchasesofthe
samebondoccurringonthesamedayatthesameprice.InTRACE,however,thedealerwhosoldthe
bondwouldreportthisasone$1milliontrade.IfweaggregatethevolumeoftheNAICtradesthat
occurinthesamebond,onthesameday,atthesameprice,theNAICtransactionwouldmatchtothe
TRACEtrade,asasingletrade.Itsworthnotingthatsincetheinsurancecompanysoldthebond
holdingsastwoseparatepiecesof$500,000eachontwoseparatedays,twodistinctsalesof$500,000
wouldbereportedastwosalesinbothNAICandTRACE.
Asecondreasonforwhyasingletrademaybereportedasmultipletradesisthatdistinct
subsidiariesofaninsurancecompanymaybookportionsofatradetotheirrespectivedivision,andeach

divisionmakesitsownstatutoryfilingstotheNAIC.Thiscanoccur,forinstance,ifpartofatradeis
allocatedtothepropertyandcasualtygroupandanotherportionallocatedtothelifeinsurancegroup.
IntheNAICdatabase,thisappearsastwotrades,whileinTRACE,itappearsasonetrade.
Weattempttocorrectforthesetworeportingproblemsbygroupingtransactionsthatwe
believecorrespondtothesametrade.Anyrecordsthatsharethesamedate,CUSIP,counterparty,
transactiontype(buyorsell),andhavepriceswithin1centofanotheraregroupedandconsidereda
singletrade.WeshowthisgroupinginTableB1.InthecleanedNAICfile,fromJanuary1,2000to
December31,2006,thenumberoftradesreducesfrom693,862to567,251.
AsdiscussedinSectionVII,groupingtradesdoesnotaffectourNAICvolumeanalysis.However,
thepricestandarddeviationincreaseswhenwegrouptrades.We,therefore,reporttheanalysisof
NAICtradesbothwithandwithoutgrouping.
ToassignthebondsinNAICtoaFINRAPhase,wesimplymatchthecleanedPhaselistfrom
TRACEusedinTableA2tothesampleofcleanedNAICbonds.TableB2reportsthenumberofNAIC
CUSIPs,andbothgroupedandungroupedtradesineachPhase.Importantly,inPhase1,wematch323
CUSIPsoutof343TRACEPhase1CUSIPs.

MarketShareAnalysis
UnlikeTRACE,whichdoesnotidentifythetransactingparties,theNAICdatabasehastwofields
whichidentifythecounterpartytotheinsurancecompanyinanNAICsellorbuytrade.Theseare:
NAMEOFPURCHASER(inaselltradebytheinsurancecompany)andNAMEOFVENDOR(inabuytrade
bytheinsurancecompany).NAICdoesnotidentifythenameoftheinsurancecompanyinvolvedinthe
transaction.Thismeansonlyoneside,thenoninsurancecompanyside,isidentifiedforeachtrade.We
usethisinformation,toconstructaCOUNTERPARTYvariable.
Importantly,thecounterpartyfieldisnotalwaysatradingpartner.Insurancecompaniesalso
usethisfieldtoidentifytransactionsthatarecalls,maturities,conversions,etc.andthesewereexcluded
fromoursampleasdescribedabove.Moreover,sinceeachinsurancecompanyselfreportsthedata,
thereareoftennamevariationsinthecounterpartyfield.Forexample,JPMorgan,JPMorgan&
Co,J.P.Morgan,J.P.MorganSecuritiesandJ.P.MorganSecurities,Inc.arelistedas
counterparties.Wecouldnotclassifysomecounterpartynamessuchas192or9UNIVERSALLIFE,so
wegroupthesecounterpartiestogetherwithnamesthatappearinfrequentlyintoaLEFTOVERcategory.
Wegroupedbyhandthecounterpartynamesinto106uniquetradingpartners.Thesecorrespondto
105actualtradingpartners(originallyfrom7,319distinctcounterpartynames),andtheLEFTOVER
category(whichrepresents4,714distinctcounterpartynames).Importantly,tradesintheLEFTOVER
categoryonlyrepresent11.0%oftradesand9.0%oftotalvolumeintheCleanedHistoricalTRACE
dataset.

Inaddition,becauseofmergers,sometradingpartners,whichappeartobelistedunder
separatenames,arereallypartofoneentity.Forexample,SalomonBrotherswasacquiredbyCitigroup
in1998,andinourcounterpartyfields,thetraderissometimesidentifiedasSalomonBrothersand
sometimesasCitigroup,eventhoughtheywerethesameentityforoursampleperiod.Weexaminedall
mergerandacquisitionactivityforour106counterpartiesandifamergertookplacebeforeJanuary1,
2000wecombinethetradingactivityunderthesuccessorcompanysname.
Thefollowinglistscounterpartiesinourdatasetthatwereacquiredbeforeoursampleperiod
andthesuccessorname:
- DEANWITTERwasacquiredbyMORGANSTANLEYonFebruary05,1997,soitiscalledMORGAN
STANLEY.
- On June 30, 1997, MONTGOMERY SECURITIES acquired NATIONSBANK, which was acquired by
BANK OF AMERICA on September 30, 1998, so MONTGOMERY SECURITIES is called BANK OF
AMERICA.
- SALOMONBROTHERSwasacquiredbyCITIGROUPin1998,soitiscalledCITIGROUP.
Ifmergeractivityoccursduringthesampleperiod,wekeepthesuccessorname.Forinstance,BANK
ONECORPwasacquiredbyJPMORGANonJuly01,2004,soitiscalledJPMORGANinoursample.There
are22counterpartiesthatmergedduringoursampleperiod:
1) ADVESTwasacquiredbyMERRILLLYNCHonDecember02,2005,soitiscalledMERRILLLYNCH.
2) ALLIANCE CAPITAL MANAGEMENT was acquired by SANFORD C. BERNSTEIN on October 02,
2000,soitiscalledALLIANCEBERNSTEIN.
3) AMSOUTH BANK was acquired by REGIONS FINANCIAL CORP on November 04, 2004, so it is
calledREGIONSFINANCIALCORP.
4) AUTRANETINCwasacquiredbyBNYonFebruary04,2002,soitiscalledBNY.
5) BANKONECORPwasacquiredbyJPMORGANonJuly01,2004,soitiscalledJPMORGAN.
6) FIRST CHICAGO BANK was acquired by NATIONAL BANK OF DETROIT, which was acquired by
BANKONECORPinApril,1998,soitiscalledJPMORGAN.
7) BONDS DIRECT was acquired by JEFFRIES AND CO on October 07, 2004, so it is called JEFFRIES
ANDCO.
8) CHASEwasacquiredbyJPMORGANonSeptember13,2000,soitiscalledJPMORGAN.
9) CREDIT LYONNAIS was acquired by CREDIT AGRICOLE on March 13, 2003, so it is called CREDIT
LYONNAISCREDITAGRICOLE.
10) DAINRAUSCHERwasacquiredbyRBConSeptember28,2000,soitiscalledRBC.
11) DONALDSON LUFKIN JENRETTE was acquired by CREDIT SUISSE on November 03, 2000, so it is
calledCREDITSUISSE.
12) FIRSTUNIONwasacquiredbyWACHOVIAonSeptember01,2001,soitiscalledWACHOVIA.
13) FLEETBOSTON FINANCIAL was acquired by BANK OF AMERICA on April 01, 2004, so it is called
BANKOFAMERICA.

14) GRUNTAL was acquired by RYAN BECK & CO on April 23, 2002, so it is called GRUNTALRYAN
BECK.
15) MORGAN KEEGAN was acquired by REGIONS FINANCIAL CORP on December 19, 2000, so it is
calledREGIONSFINANCIALCORP.
16) PAINWEBBERwasacquiredbyUBSonNovember03,2000,soitiscalledUBS.
17) PRUDENTIAL SECURITIES was acquired by WACHOVIA on July 01, 2003, so it is called
WACHOVIA.
18) SPEAR LEADS & KELLOGG was acquired by GOLDMAN SACHS on September 11, 2000, so it is
calledGOLDMANSACHS.
19) STANDISHwasacquiredbyMELLONonJuly31,2001,soitiscalledMELLON.
20) TUCKERANTHONYwasacquiredbyRBConMarch08,2002,soitiscalledRBC.
21) USBANCORPspunoffPIPERJAFFRAYonDecember31,2003,soitiscalledPIPERJAFFRAYasUS
BANCORP.
22) WASSERSTEIN & PERELLA was acquired by DRESDNER KLEINWORT on January 01, 2001, so it is
calledDRESDNERKLEINWORT.
When we consolidate counterparties, we have 617,745 trades conducted by 86 unique traders and
76,116 trades for the LEFTOVER category, for a total of 693,861 trades. The total par volume in the
LEFTOVERcategoryis135,375,226,962,whichrepresents9.0%ofthetotalNAICtradingactivity.


CUSIPs Trades
(1) (2)
Source:HistoricalTRACEFile 35,695 35,284,669
Eliminatebondsbasedoncharacteristics
BondsunmatchedtoFISDbyCUSIP 1,156 200,482
Convertiblebonds 1,375 2,297,404
Exchangeablebonds 113 20,420
Otherequitylinkedbonds 615 221,543
SECRule144abonds 551 38,583
Bondswithmissingissuesizeorissuesize<100,000 348 95,723
Adjustpricesforcommissionspaid(thesetransactionsareNOTdropped,pricesarechanged) 19,999 699,833
Eliminatetradeswhichdonottakeplaceorwhendisseminationisdelayed
Modifies:matchedtoearlierrecordusingsequencenumber 23,877 883,146
Cancels:matchedtoearlierrecordusingsequencenumber 22,557 504,789
Cancels:notmatchedtoearlierrecord 2,502 4,201
Reversals:matchedtoearlierrecordusingsevenwaymatch 21,234 837,740
Reversals:matchedtoearlierrecordusingsixwaymatch 7,507 64,700
Reversals:notmatchedtoearlierrecord 9,216 44,849
Delayedreversals 2,794 60,698
Delayeddisseminations 612 1,382
Eliminatetradeswhicharereportedmorethanonce
Dealerbuys(total) 28,417 6,578,859
Dealerbuysmatchedtodealersellswiththesameexecutiontime 20,710 590,372
Dealerbuysmatchedtodealersellswithdifferentexecutiontimes 26,703 4,468,884
Unmatcheddealerbuys 26,703 1,519,603
Agencytrades(agencybuysmatchedtoagencysells) 18,424 563,658
Eliminatedtradeswithpriceandvolumedataissues
Tradeswithmissingprice 106 211
Tradeswith0price 0 0
Tradeswithnegativeprice 0 0
Tradeswithpricegreaterthan220 497 806
Tradeswithvolume/issueamount50%andparvalueorissueamountisnotequalto0or1 2,222 4,597
Tradeswithvolumelessthan1000 2,189 5,323
Eliminatedtradeswithtimingissues
Tradesexecutedbeforebond'sofferingdate 6,654 247,012
Tradesexecutedafterbond'smaturitydate 342 78,052
Tradeswithdifferentreportingandexecutiondates 30,736 799,570
TradesthatoccuronSIFMAHolidays 30,671 581,396
CleanedHistoricalTRACESample 30,643 21,149,525
TableA1.StepsfromHistoricalTRACEFiletoCleanedHistoricalTRACESample
Notes.Filtersareappliedsequentially.ThistablereportsthestepsfromthehistoricalTRACEfiletotheCleanHistoricalTRACEfile.
Otherequitylinkedbondshave"KNOCK","REVERSE","EQUITY","LINKED",and"TBD"inthebond'sFISDissuename.Asevenway
matchisbasedonCUSIP,executiondate,executiontime,price,quantity,buysellindicator,anddealercustomerindicator.Asixway
matchdropstheexecutiontimerequirement.Pricecutoffof220isbasedoncomputingabond'svaluebasedonitsmaturity,
couponsremainingandlowestvalueofthetreasuryyieldcurveduringourentiresampleperiod.Themaximumforoursampleis
214,whichweroundto220.SIFMAholidayscorrespondto"RecommendedEarlyClose"and"RecommendedFullClose"dateslisted
athttp://www.sifma.org/uploadedfiles/research/statistics/statisticsfiles/miscushistoricalholidaymarketrecommendations
sifma.pdf
CUSIPs Trades
(1) (2)
CleanedHistoricalTRACESample(afterTableA1) 30,643 21,149,525
Source:FINRAlistofPhase13Bbonds 26,955
BondsonbothFINRAPhaselistandCleanedHistoricalTRACESample 20,595 17,434,020
Phase1
listofPhase1bonds* 450 4,539,063
bondsinFINRA50atstartofphase 4 32,231
bondsdonotexistasofstartofphase 60 685,047
bondsdonotexistduringtheperiod90daysbeforeuntil90daysafterstartofphase 33 285,253
bondswithnondisseminatedtradesafterstartofphase 10 35,034
CleanedPhase1Sample 343 3,501,498
Phase2
FINRA'slistofPhase2bonds 3,747
Phase2bondsinCleanedHistoricalTRACESample 3,049 2,934,214
bondsinFINRA50beforeoratstartofphase 0 0
bondsdonotexistasofstartofphase 272 21,459
bondsdonotexistduringtheperiod90daysbeforeuntil90daysafterstartofphase 229 150,854
bondswithdisseminatedtradesbeforestartofphase 2 4,380
bondswithnondisseminatedtradesafterstartofphase 8 25,636
CleanedPhase2Sample 2,538 2,731,885
Phase3A
FINRA'slistofPhase3Abonds 16,898
Phase3AbondsinCleanedHistoricalTRACESample 13,260 8,336,332
bondsinFINRA50orFINRA120beforeoratstartofphase 78 603,109
bondsdonotexistasofstartofphase 983 168,549
bondsdonotexistduringtheperiod90daysbeforeuntil90daysafterstartofphase 1,075 259,894
bondswithdisseminatedtradesbeforestartofphase 36 330,722
bondswithnondisseminatedtradesafterstartofphase 1 244
CleanedPhase3ASample 11,087 6,973,814
Phase3B
FINRA'slistofPhase3Bbonds 5,780
Phase3BbondsinCleanedHistoricalTRACESample 3,678 1,362,059
bondsinFINRA50orFINRA120beforeoratstartofphase 26 52,945
bondsdonotexistasofstartofphase 648 235,319
bondsdonotexistduringtheperiod90daysbeforeuntil90daysafterstartofphase 132 46,791
bondswithdisseminatedtradesbeforestartofphase 15 22,135
bondswithnondisseminatedtradesafterstartofphase 4 1,738
CleanedPhase3BSample 2,853 1,003,131
TotalCleanedPhase13BSample 16,821 14,210,328
TableA2.StepsfromFINRA'sPhaseListingstoCleanedPhaseSample
Notes.ThistablereportsthematchbetweentheCleanedHistoricalTRACEfileandFINRA'sPhaseListings.Notallbondsinthe
TRACEHistoricalSampleareclassifiedinaFINRAPhase.Excludedbondsarethoseissuedafter7/1/02thatarealways
disseminatedandthosethatmaturebefore2/7/05thatareneverdisseminated.WeconstructthePhase1listbyincludingall
bondswithdisseminatedtradesbeforePhase2thatarenotontheFINRAPhase2,3A,or3Blists.ThePhase2,3A,and3Blists
wereobtaineddirectlyfromFINRA.TheFINRA50andFINRA120listsarefromwww.finra.org.BondsinFINRA'sPhaseliststhat
arenotintheCleanedHistoricalTRACESamplehaveeithernevertradedduringthesampleperiodorhavebeeneliminateddue
tocleaningprocessinTableA1.
CUSIPs
Ungrouped
Trades
Grouped
Trades CUSIPs
Ungrouped
Trades
Grouped
Trades
OriginalSource:NAICTransactionsFile 63,859 1,933,095 1,490,831 50,968 1,341,471 1,032,124
MatchNAICBondswithCleanedHistoricalTRACEsample
CUSIPnotfoundinCleanedHistoricalTRACEsample
46,060 805,483 625,403 33,645 533,092 417,881
Eliminatetransactionswhicharenottrades
Nontradeindicatedbycounterpartyfieldentry(calls,converts,etc.)
13,996 290,802 210,425 13,424 233,247 161,140
Eliminatetradeswithdataissues
MissingPrice
407 879 593 407 879 593
ZeroPrice(orZeroParValue)
154 286 265 153 285 264
NegativePrice(orNegativeParValueAmount)
151 194 190 132 162 159
Pricegreaterthan220
53 85 80 50 82 77
Tradeswithvolume/issueamount>=50%&(ParValueorIssueamountnotequalto0or1)
359 647 627 235 421 405
Tradeswithvolumelessthan1000dollars
140 295 280 116 249 235
Eliminatedtradeswithtimingissues
Tradesexecutedonorbeforebond'sofferingdate
7,371 112,413 61,052 5,187 73,700 40,783
Tradesexecutedonorafterbond'smaturitydate 925 1,585 1,461 925 1,585 1,461
TradesexecutedonweekendorSIFMAHoliday 7,308 26,539 23,305 5,404 16,619 14,525
PostJuly2002tradesexecutedondayswithnoTRACEtrades** 7 13 9 7 13 9
CleanedHistoricalNAICSample 16,005 693,861 567,250 14,573 481,134 394,678
January1,2000December31,2006 July1,2002December31,2006
TableB1.StepsfromHistoricalNAICFiletoCleanedHistoricalSample
Notes:Filtersareappliedsequentially.TheCUSIPscolumngivestotalnumberofCUSIPseliminatedfromthedatabasebyaddingthatrow'sfilter.Thetradescolumngivestotal
numberofobservationseliminatedbyaddingthatrow'sfilter.*Pricecutoffof220basedoncomputingtheabond'smaturity,couponsremainingandlowestvalueofthetreasury
yieldcurveduringourentiresampleperiodandtakingthemaximumacrossbonds.Thatvalueof214isroundedto220.**OnJune11,2004,theSECdeclaredaholidaywhen
becausePresidentReagandied.GroupingisdoneifthedifferenceinPriceis<=|0.01|andtheday,counterparty,insurertype,andbuyorsellareequal.
Phase1 Phase2 Phase3A Phase3B
(1) (2) (3) (4)
CUSIPs
PhaseCUSIPsinCleanedNAICDataset 323 2,192 4,710 2,076
PhaseCUSIPsinCleanedTRACEDataset 343 2,682 11,171 2,855
NAICCUSIPs/TRACECUSIPs 94.2% 81.7% 42.2% 72.7%
Volume
NAICvolume 15,260,658,392 15,072,130,358 14,470,216,388 1,625,677,320
TRACEvolume 243,403,051,641 130,940,914,944 200,109,997,753 37,075,185,871
NAICvolume/TRACEvolume 6.3% 11.5% 7.2% 4.4%
Trades
UngroupedNAICtrades 6,775 15,056 16,231 3,812
GroupedNAICtrades 5,409 12,236 13,056 3,083
TRACEtrades 351,606 221,460 404,035 42,645
UngroupedNAICtrades/TRACEtrades 1.9% 6.8% 4.0% 8.9%
GroupedNAICtrades/TRACEtrades 1.5% 5.5% 3.2% 7.2%
TradeSize
NAICUngroupedAverageTradeSize 2,252,496 1,001,071 891,517 426,463
NAICGroupedAverageTradeSize 2,821,346 1,231,786 1,108,319 527,304
TRACEAverageTradeSize 692,261 591,262 495,279 869,391
NAICUngroupedAverage/TRACEAverage 3.3 1.7 1.8 0.5
NAICGroupedAverage/TRACEAverage 4.1 2.1 2.2 0.6
CUSIPs/BondDaysused
UngroupedNAIC 253/1,333 392/837 464/933 109/164
GroupedNAIC 213/969 261/481 273/483 65/87
TRACE 340/17,087 2,130/40,713 6,342/70,094 1,129/8,786
PriceStandardDeviation
UngroupedNAIC 0.26 0.26 0.39 0.04
GroupedNAIC 0.42 0.40 0.70 0.04
TRACE 0.88 0.78 0.68 0.45
UngroupedNAICStd.Dev./TRACEStd.Dev. 0.30 0.33 0.57 0.09
GroupedNAICStd.Dev./TRACEStd.Dev. 0.48 0.51 1.02 0.09
Notes.ThistablereportsoncomparisonsbetweenthecleanedNAICfileandtheHistoricalTRACEfilefor90calendardaysafterthePhaseStart.
TableB2.ComparisonofNAICandTRACETradingActivity90DaysAfterPhaseStart
A.CUSIPs
B.VolumeandTrades
C.PriceStandardDeviation

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