What it means
Most bonds are not traded on a public exchange with a screen price. They are traded over the counter (OTC), meaning by phone or electronic message between dealers and customers, so before TRACE it was hard for an ordinary investor to know whether a quoted price was fair.
TRACE changed that by requiring FINRA member firms to report eligible bond transactions, including corporate bonds and many other fixed income securities, within a short time after the trade. FINRA collects the reports, checks them and releases price and volume information to the public for most of the bonds covered.
The system is a reporting facility and not a market. It does not match buyers and sellers or hold anyone's money; it simply records what happened, which makes it a source of transparency (visibility of prices) and a tool for regulators to look for unfair practices.
Finance teams use TRACE data in several ways. Treasurers check whether a dealer's price for a bond they want to sell was reasonable, analysts use the trade history to judge how easily a bond can be bought or sold, and auditors use it as evidence when valuing bonds that do not trade every day.
The data is not perfect. Very large trades may be shown as capped sizes rather than exact amounts, some bonds trade only a few times a year, and the last reported price may be old, so it should be treated as a guide and not a guaranteed price.
TRACE is a US system covering US bond markets, and other regions have their own reporting rules. Do not confuse it with exchange-traded data for shares, which comes from a different process.
In practice
Real-world examples.
Example
A corporate treasurer wants to sell a $5,000,000 holding of a company's bonds. Before accepting the dealer's bid, she checks recent TRACE prints for the same bond and finds that similar trades were done about 0.4 points higher, so she asks for a better price.
Example
An auditor needs to value a bond held by a pension fund that rarely trades. She uses recent TRACE trade prices, adjusted for the time elapsed, as supporting evidence for the fair value in the accounts.
Example
A compliance officer at a brokerage compares the firm's customer trades with TRACE prices every month. Trades with unusually high markups are flagged for review so that the firm can show it treated clients fairly.
Formula
Calculation
Dealer markup = (Price paid by customer - Prevailing market price) x Face value / 100
Bond prices are quoted as a percentage of face value, so a price of 101.50 means $101.50 for every $100 of face value. Suppose a customer buys $200,000 of face value at 101.50, while TRACE shows that dealers traded the same bond at about 101.00 around the same time. The markup in price points = 101.50 - 101.00 = 0.50, and in dollars = 0.50 x 200,000 / 100 = $1,000. As a share of the market value of 101.00 x 2,000 = $202,000, the markup is 1,000 / 202,000 = 0.495%, or about 0.5%.Case study
Seen in the real world.
Summit Ridge Pension Trust is an illustrative, fictional pension scheme that held $12,000,000 face value of a bond issued by a mid-sized industrial company. When it decided to sell, a dealer offered 98.20, saying the market for the bond was thin.
The trust's finance officer looked up the bond on TRACE and found three trades in the previous week at prices between 98.90 and 99.10. The difference between the dealer's bid and the recent trades was about 0.8 points, which on $12,000,000 of face value was 0.8 x 120,000 = $96,000.
She went back to the dealer with the data and a second dealer's quote, and the trust sold at 98.95. The illustrative lesson is that publicly reported trade prices give a buyer or seller something factual to negotiate with, even in a market without a screen price.
Watch out
Common mistakes.
- Treating TRACE as a stock exchange where you can place orders, when it is only a reporting and dissemination system.
- Assuming the last reported price is the price you can trade at now, when the market may have moved or the trade may have been a small odd lot at a different price.
- Expecting TRACE to cover every security, when its scope is set by FINRA's rules and includes particular fixed income products.
Questions
People also ask.
Who has to report to TRACE?
FINRA member firms that trade eligible bonds are required to report their transactions, usually dealers and broker-dealers, not the end investors.
Can individual investors see TRACE data?
Yes, FINRA makes trade information for many bonds available to the public free of charge on its website, and data vendors provide fuller feeds for a fee.
Does TRACE show who bought and sold?
No, the public data does not name the parties, though FINRA and regulators can see more detail when investigating.
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