The Regional Bond Dealers Association is recommending that the Securities Industry and Financial Markets Association discontinue its practice of recommending early closes on the last business day before most holidays, saying it hurts liquidity on those days.
In a letter to SIFMA, the RBDA suggested it cancel its already recommended early closes in 2009 and 2010, and limit them to the day after Thanksgiving and Christmas Eve, when equity markets also close early. SIFMA recommended 11 early closes for this year, including five Fridays ahead of a Monday holiday.
Although the closes are only recommended, the RBDA said that large "bulge-bracket" securities firms follow them, often keeping only limited trading staffs on hand. This has an effect on the entire market and creates a holiday atmosphere where firms "operate at less-than-full capacity" even when the market is open, hurting liquidity and customer service.
Trading often slows down well ahead of the 2 p.m. closing. On July 3, 2008, for instance, a total of $8.3 billion of municipal bonds traded, according to the Municipal Securities Rulemaking Board, less than half of the $18.6 billion of bonds that traded the day before.
Investors are not as active on early closes because they know liquidity will be light on those days, the RBDA said. But in the current market environment, it is especially important to give investors as much opportunity as possible to react to events, the RBDA said.
Without early closes, the market "will function more normally on those days and will benefit from better trading conditions," the RBDA wrote.
"Closing the bond markets early on the last business day before a holiday serves no useful purpose," RBDA co-chief executive officers Michael Decker and Mike Nicholas wrote in a letter.
The RBDA also sent the letter to Treasury Secretary Timothy Geithner. The Treasury Department in January asked SIFMA to limit the number of early closes.
In response to the RBDA, SIFMA said in a statement that it "appreciates input from outside parties involved in market issues and values hearing others' opinions."
"SIFMA consistently reviews its policies on various market practices with the goal of ensuring orderly and liquid markets," it said. "If SIFMA makes changes to its early or full close recommendations, we will announce those changes in due course."
