Knowing the best way to trade municipal bonds

May 7, 2014

For retail investors, it has always been a little murky where their municipal bond trades are executed. Municipal bonds can officially trade on the New York Stock Exchange Bonds platform, but they rarely do. Instead, almost all municipal bond trades happen over-the-counter between dealers via alternative trading platforms like Bonddesk (a part of Tradeweb that is majority-owned by Thomson Reuters) or The MuniCenter. Unlike the equity market, municipal bond brokers are not required to disclose where they execute a specific trade.

Brokers are only required to give customers “fair pricing.” They are not required to route retail orders to where they will find the best execution. The fair pricing rule requires “the dealer either will need to know the current market value of the security, or will have to use diligence in the attempt to ascertain it.” A requirement for “fair pricing” is a lower standard than “best execution.”

The Municipal Securities Rulemaking Board announced that it will seek approval for a new best execution rule that governs how broker-dealers handle retail orders for municipal bond trades.

The MSRB agreed to seek approval from the Securities and Exchange Commission (SEC) to implement a ‘best-execution’ standard for transactions in the municipal market. The rule would establish for the first time an explicit obligation for dealers to use ‘reasonable diligence’ when handling and executing municipal security trades for retail investors to achieve a price that is as favorable as possible under prevailing market conditions.

Note the key phrase: “achieve a price that is as favorable as possible under prevailing market conditions.” This is a positive step for retail investors.

There are reporting requirements for equities that could be adopted for municipal bond trades. From the SEC:

These rules also require brokers that route orders on behalf of customers to disclose, on a quarterly basis, the identity of the market centers to which they route a significant percentage of their orders. In addition, brokers must respond to the requests of customers interested in learning where their individual orders were routed for execution during the previous six months.

Retail investors can see the bid/offer price for a security on alternative trading system platforms via online systems like Yahoo or E-Trade. If an investor is able to determine on which venue a bond trade is executed, she could determine the markup or markdown she is paying. She could even request a better price from the broker. At least investors would have another piece of the puzzle.


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It’s best to review the recent trades of a given bond by its CUSIP on the MSRB EMMA website. Searching by bond description on Yahoo or similar sites can result in erroneous price info. Also, use Vanguard’s bond desk to reduce markup.

Posted by CraigL | Report as abusive

As a founder of Hennion & Walsh, I am all in favor of more transparency in trading munis. Retail investors should also keep something else in mind: 1) if they are dealing with a “broker,” they should know if they are dealing with a registered broker-dealer that operates its own trading desk. A broker-dealer’s active desk can purchase munis in large volumes, which generally benefits the end investor in terms of both pricing and yield.

Posted by BillWalsh | Report as abusive