GAO Report: Retail Municipal Bond Traders Ripped Off

February 27th, 2012 by

Retail traders are being overcharged by 2.5% on small trades.

After the financial crisis, congress passed Dodd-Frank in an effort to clean-up the financial services space. One of the targets of this bill was the municipal bond market. For many years, there has been anecdotal evidence that retail clients were getting poor execution of municipal bond trades. Dodd-Frank mandated that the non-partisan General Accounting Office (GAO) study the issue. Their full report which was just released, “Municipal Securities: Overview of Market Structure, Pricing and Regulation” demonstrated that retail traders/investors (meaning non-professionals) are being unfairly priced.

Their basic finding was the smaller the trade size, the greater the amount clients are being overcharged. The discrepancy between what professionals and retail clients paid disappeared when the trade size was over $250,000.

 

Trade Size Difference Between Retail & Pro Pricing

Under 10K

2.5%

10-20K

2.2%

20-50K

1.7%

50-100k

0.8%

The difference in pricing dropped to under 0.5% between 100K – 250K transaction sizes. There are legal limits to how much a broker-dealer can mark-up the price of a bond when selling it to a retail client. They can legally add 5.00% to the price of the bond, indicating that most execution is legal if not ethical. Now that congress has this information, what are they planning on doing with it? So far, I have not heard any Congressmen commenting on the report.

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