What Is Trade Reporting and Compliance Engine?

Trade Reporting and Compliance Engine (TRACE) is a program developed by the National Association of Securities Dealers (NASD) that allows for the reporting of over-the-counter (OTC) transactions pertaining to eligible fixed-income securities. Brokers, who are NASD members and deal with specific fixed-income securities, are required to report their transactions by Securities and Exchange Commission (SEC) rules.

Trade Reporting and Compliance Engine Explained

From 1998-2001, the SEC approved rules adopted by the NASD regarding the transactions in all U.S. corporate bonds and secondary OTC fixed-income transactions. These rules were developed to bring greater price transparency to bond markets. Subsequently, TRACE was brought into play in 2002 to comply with the newly approved rules. The program replaced the previous Fixed Income Pricing System (FIPS) used since 1994.

TRACE is operated by the Financial Industry Regulation Authority (FINRA). The program provides individual investors and market professionals with access to information on nearly all OTC public and private fixed income trading activity. The TRACE program offers a consolidation of transaction data for public and private corporate bonds, agency debt, and securitized products. That includes asset-backed securities and mortgage-backed securities.

What the TRACE Provides to the Market and Regulators

FINRA says that TRACE’s services further enhance the integrity of the market. Investors receive access to such real-time data in order to better understand and gauge the performance of their broker-deals. Furthermore, FINRA asserts that TRACE assists regulators with the monitoring of the market, pricing, and execution quality.

There are different tiers of service available through TRACE that are paid and nonpaid. Personal, noncommercial access is free for real-time data displays of transaction information. Access for an individual professional user or an enterprise-level license for those displays requires payments. Access to displays of TRACE data available via major market data vendors and some financial websites.

Other data services and feeds available through TRACE include end-of-day transaction and activity reports, market activity and performance indicators, and enhanced historical data.

For example, TRACE’s enhanced historical data includes transaction-level information such as the price of the transaction, date and time of execution, transaction size, and the yield. The data also includes information such as buy/sell indicators and counterparty information. Those details were not previously available to the public.

According to FINRA, use of the TRACE program is meant to establish a level playing field for all market participants. This is accomplished by providing them with real-time access to bond price information in a comprehensive fashion. The distribution of timely trading data is intended to ensure there is equal access available on reliable bond information on corporate, agency, and structured products.