The FSA has put out a discussion paper on Trading transparency in the UK secondary bond markets ( http://www.fsa.gov.uk/pages/library/policy/dp/2005/05_05.shtml). This paper is in response to the possibility that greater transparency may be mandated under MiFID, the European Union’s Market in Financial Instruments Directive. MiFID currently imposes transparency obligation on the equity market but Article 65 requires the Commission to report on whether the pre and post-trade transparency obligations should be extended to transactions in bonds as well.
The FSA discussion paper provides a nice review of the academic literature on the role of transparency and also provides a comprehenseive description of the bond market in the UK. It is onstensibly neutral on whether more transparency is needed, but on closer reading it is clearly biased towards maintaining the status quo. It argues that the basic question to be asked before imposing a transparency obligation is whether there is a market failure that needs to be corrected. The problem is that market failure is too strong a word to describe the effect of opaque markets. Opaque markets may be unfair to classes of investors and may also be inefficient, but these do not probably rise to the level of market failure.
For example, the discussion paper while pointing out that post trade information is not publicly available observes that this information is available to those who subscribe to the services of various vendors. The point is that this may well be enough to prevent market failure but not sufficient to meet the regulator’s obligations regarding investor protection.