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Beginning May 14, amended rules from the Municipal Securities Rulemaking Board ("MSRB") now require bond dealers to explicitly disclose their compensation, known as a "markup", to retail clients for each municipal bond transaction. "Markups" are defined by MSRB as the difference between what a customer pays and the prevailing market price. This is a significant positive development for retail investors and it improves the transparency of bond trading costs within a broker-dealer relationship.
Unlike equity markets, where centralized trading exchanges help retail investors more easily understand prevailing market prices and transaction costs, the decentralized (“over-the-counter”) trading within the municipal bond market leads to an opaque price discovery process. In many cases, investors have been unaware of the specific markup they pay on a given trade. Or worse, some might not even know they were being charged at all.
According to a 2013 study by Standard & Poors1, markups on investment-grade municipal bond retail trades under $100,000 have averaged 1.21% historically. For comparable dealer-to-dealer trades, this transaction cost has averaged 0.49%. Why the difference? In at least some cases it is likely because bond dealers knew they could charge a higher markup when trading to a less informed retail investor.
Previously, confirmation statements contained only the total price paid for a bond (and resulting yield) with the markup buried in the price. Going forward, confirmation statements of trades will include the total dollar markup and total percentage markup relative to the prevailing market price as separate items.
For a fee-only firm like Oxford, this amendment has no impact on our business. Oxford does not receive any markups on bond transactions. The managers of municipal bond accounts we utilize on behalf of our clients do not receive markups. We are supportive of this amendment by the MSRB and believe it not only improves transparency for investors, but it lifts the veil on a conflicted business model.
1Gurtin Municipal Bond Management, Standard & Poors (“Unveiling the Hidden Costs of Retail Bond Buying & Selling”, January 2016)
The above commentary represent the opinions of the author as of 5.31.18 and are subject to change at any time due to market or economic conditions or other factors.Print