Corporate-bond brokers may face a squeeze on profits asregulators start publishing prices for almost $1 trillion ofprivately sold debt, if the past is any guide.

The Financial Industry Regulatory Authority, seeking to “fostermore competitive pricing,” plans to start disseminating tradinglevels for securities issued under a rule known as 144a on its11-year-old Trace system within the next year. That means thenotes, sold only to institutional investors, will face the sameprice transparency as publicly registered corporate bonds for whichbuyers demand half a percentage point less in yield spreads.Brokers typically are paid larger fees from higher-yieldingdebt.

Firms from Knight Capital Group Inc. to Gleacher & Co. andPierpont Securities LLC sold or shuttered credit units this year ascorporate-bond trading volumes fell to the lowest proportion of themarket on record and smaller price swings shrink potential profitmargins. In the 90 days after Trace started disseminating prices ofjunk bonds, trading in the securities dropped 41 percent, accordingto Massachusetts Institute of Technology and Harvard Universityresearchers.

“You get a certain amount of insecurity because of how opaquethis market has been,” Ari Gabinet, OppenheimerFunds Inc.'s generalcounsel in New York, said in a telephone interview. “Without activemarket information, you don't have a good way of assessing yourexecution.”

Sprint Corp. and Tenet Healthcare Corp. are among companies thathave issued bonds under the 144a rule this year, according to datacompiled by Bloomberg. The securities have grown to account for 33percent of dollar-denominated junk-bond trading, the greatestpercentage on record and up from about 25 percent a year ago,Barclays Plc data show.

There are as much as $300 billion of speculative-grade notes inthe U.S. filed under the rule, and about $670 billion ofdollar-denominated investment-grade corporate bonds, according toBarclays.

Investors are demanding an average of 54 basis points, or 0.54percentage point, more yield to own speculative-grade 144a bonds,which require less financial disclosure than publicly registeredsecurities, Barclays data show.

Cost Savings

By selling bonds under Securities Act Rule 144a, corporateborrowers can avoid filing financial disclosures as long as theysell the notes only to qualified institutional buyers, saving themmoney otherwise spent on regulatory compliance. That often leads tohigher yields to compensate investors for the reduced transparencyand liquidity that can make it tougher to sell the bonds.

The change will “enhance pre-trade price discovery, foster morecompetitive pricing, reduce costs to investors and assist marketparticipants in determining the quality of their executions,” Finrasaid in a July 17 filing with the U.S. Securities and ExchangeCommission, asking for approval to expand Trace to include pricedissemination on 144a bonds.

“The Trace expansion is coming at a time when dealers alreadyare dealing with increased legal, compliance and other costs,including tightening capital regulation,” said Russell Sacks, apartner at law firm Shearman & Sterling LLP. “You can see howsmall dealers especially, but dealers of any kind, would seethemselves as being under pressure from both sides.”

Elsewhere in credit markets, Wal-Mart Stores Inc. plans to sellbonds in a two-part offering that includes its second 30- yearsecurities this year. China National Offshore Oil Corp., parent ofthe nation's biggest offshore energy explorer Cnooc Ltd., signed $3billion of syndicated loans with 11 banks.

The cost to protect against losses on U.S. corporate debt waslittle changed. The Markit CDX North American Investment GradeIndex, a credit-default swaps benchmark that investors use to hedgeagainst losses or to speculate on creditworthiness, declined 0.3basis point to a mid-price of 78.7 basis points as of 11:55 a.m. inNew York, according to prices compiled by Bloomberg.

In London, the Markit iTraxx Europe Index of 125 companies withinvestment-grade ratings increased 0.2 to 97.7.

Verizon Bonds

The indexes typically fall as investor confidence improves andrise as it deteriorates. Credit swaps pay the buyer face value if aborrower fails to meet its obligations, less the value of thedefaulted debt. A basis point equals $1,000 annually on a contractprotecting $10 million of debt.

The U.S. two-year interest-rate swap spread, a measure ofdebt-market stress, fell 2 basis points to 13.25 basis points,reaching the lowest intraday level since Sept. 16. The gaugetypically narrows when investors favor assets such as corporatebonds and widens when they seek the perceived safety of governmentsecurities.

Bonds of Verizon Communications Inc. are the most activelytraded dollar-denominated corporate securities by dealers today,accounting for 7.7 percent of the volume of dealer trades of $1million or more, Trace data show. The New York-based telephonecarrier raised $49 billion on Sept. 11 in the largest corporatebond issue ever.

Wal-Mart, the world's largest retailer, intends to issue seniorunsecured debt due in December 2018 and October 2043, according toa person with knowledge of the sale, who asked not to be identifiedbecause terms aren't set. Wal-Mart has $44.2 billion of bondsoutstanding, according to data compiled by Bloomberg.

The offering will be of benchmark size, typically at least $500million, the person said. Wal-Mart is rated Aa2 by Moody'sInvestors Service and an equivalent AA at Standard & Poor's andFitch Ratings.

China National Offshore Oil obtained $2 billion in a one- yearterm facility and $1 billion in a five-year term portion, accordingto three people familiar with the matter, who asked not to beidentified because the details are private. The deal was signed onSept. 17, they said.

The company completed the loan as the oil and gas producer seeksto raise even more debt. The company is considering selling U.S.dollar-denominated bonds and has hired banks to arrange meetingswith investors in Europe and the U.S., a person familiar with thematter said last week.

The lenders are Australia & New Zealand Banking Group Ltd.,Bank of America Corp., Bank of China Ltd., Barclays, ChinaConstruction Bank Corp., Citigroup Inc., Commonwealth Bank ofAustralia, Goldman Sachs Group Inc., HSBC Holdings Plc, Mizuho BankLtd. and Sumitomo Mitsui Banking Corp., the people said.

Dissenting Opinion

Finra's plan to publish trade information for 144a bonds, thefirst expansion of Trace's corporate-debt offerings since 2006,drew a dissenting opinion from the Securities Industry andFinancial Markets Association. Disseminating the privately solddebt's pricing “is not appropriate or necessary at this time,”Sifma's Chris Killian wrote in a Nov. 16 comment letter, citing“concerns around changes in market liquidity and the impact of manyregulatory changes.”

The SEC approved Finra's plan to publicly report trades of 144acorporate bonds this month. Finra has until Nov. 6 to release aschedule for its implementation, which then must take effect within270 days of the publication of that regulatory notice.

Trace reporting, which was introduced in 2002, has contributedto a reduction in trading of corporate bonds while cutting pricevolatility in the market, researchers at MIT and Harvard saidearlier this month in a study of Finra data. Junk- bond tradingfell 41.3 percent and price dispersion shrank 24.7 percent in the90 days after the final phase of Trace's implementation started,according to the study.

“As with all fixed income, you're talking about an assetclass that's thinly traded,” said Mark Hepsworth, president ofpricing and reference data for Interactive Data Corp. “The moremarket color can be shared the better. We think it can be acontributing factor in increasing trading liquidity.”

Trading volumes have dropped to 0.3 percent of the $5.4 trillioncorporate-bond market in the U.S., about the lowest proportionever, as transactions fail to keep pace with unprecedentedissuance. After reaching a record-low 3.35 percent on May 2, yieldson securities issued by the riskiest to the most-creditworthyborrowers are holding more than a percentage point below theaverage of 5.18 percent since 2008, Bank of America Merrill Lynchindex data show.

The extra yield investors demand to own the debt instead ofsimilar-maturity Treasuries has plunged 586 basis points during thesame period to 218 basis points, reducing the potential margin forbroker profits.

Pierpont, Gleacher

The difference between prices at which brokers will buy and sellbonds typically widens as yields increase and tighten as theydecline. The MarketAxess High-Grade Bid-Ask Spread Index, whichgauges liquidity in U.S. corporate bonds, plunged to 8.18 on Sept.23 from 42.6 on Nov. 3, 2008. In that period, yields on the debtdropped to 4.09 percent from 10.96 percent, according to the Bankof America Merrill Lynch U.S. Corporate & High Yield Index.

Stamford, Connecticut-based Pierpont, one of the dealers startedafter the 2008 collapse of Lehman Brothers Holdings Inc. decided toexit the high-yield bond and loan business this month. NewYork-based Gleacher said in April that it was exiting fixed-incometrading and sales. Knight in Jersey City, New Jersey, sold itscredit-brokerage unit to Stifel Financial Corp., according to aJuly 1 statement.

Jefferies Group LLC, the investment bank owned by LeucadiaNational Corp., said profit plunged 83 percent in the three monthsended Aug. 31 as trading revenue fell to the lowest since thedepths of the financial crisis.

“We're in a more regulated world,” said Eric Gross, a creditstrategist at Barclays in New York.

As the 27-country Basel Committee for Banking Supervisionincreased capital withholding standards for banks, the 21 primarydealers authorized to trade with Federal Reserve have cutcorporate-debt holdings 11 percent, to $16.6 billion on Sept. 11,from $18.7 billion on April 3. That follows a 76 percent reductionin inventories from the peak in 2007 through March, when the Fedchanged the way it reported the data.

“It's a balance between consolidation in the brokerage industryand inefficient business models,” OppenheimerFund's Gabinet said.“When the balance gets out of whack in either direction, thosemarkets get squeezed.”

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