MSRB Publishes Report on Secondary Market Trading in the Municipal Securities Market (with Lofchie Comment)
The MSRB published a report on secondary market trading in the municipal securities market. The report, authored by Eric Sirri, former head of the SEC's Division of Trading and Markets, focuses on pricing in secondary market transactions in municipal securities.
The report is intended to provide a baseline set of statistics about municipal bond trading. It describes the overall effect on pricing patterns related to the movement of municipal bonds through the marketplace by examining pricing differentials between two consecutive (or paired) trades in a security, and when a security is sold by an investor (or customer) in the marketplace, through one or more municipal securities dealers, to another investor purchasing that security.
The report also examines varying pricing differentials for different types of paired trades in the municipal securities market, outlining the relationship of pricing differentials to: (i) the amount of time between the initial customer sale and the final customer purchase; (ii) the number of dealer intermediaries involved between the initial customer sale and the final customer purchase; and (iii) the trade size of the municipal securities being bought and sold.
One of the key findings of the report is the reduction in pricing differentials for customer-to-customer trades; (i.e., customers fared better) following the implementation of real-time trade reporting in 2005, when the MSRB made municipal transaction prices publicly available within 15 minutes of execution of the trade.
Lofchie Comment: Beyond its particular topic, the report is illustrative of the type of careful, reasoned and retrospective analysis that various regulators should be conducting regularly as to the impact of their rules. It would be a great advance for financial regulation if, when rules were adopted or amended, consideration could be given to how a post-effective study might be implemented to examine the impact of those rules, as Mr. Sirri has done with respect to municipal bond trading. One aspect of the study that seems particularly meaningful as a guide to the manner in which financial regulators should strive to operate is that the data behind the study appears to be generally available (see footnote 8 of the report), so that others may attempt to verify or challenge the report's conclusions.
See: MSRB Report: Report on Secondary Market Trading in the Municipal Securities Market.