3.4. Municipals Trading in the Secondary Market

Once municipal bonds have been issued, they are traded in a highly fragmented over-the-counter market. By comparison to the 6,000 corporations that operate in the equities market, more than 50,000 municipal issuers offer well over a million different securities. Issue size is generally small in this market and price transparency is limited. This makes for a secondary market that is highly illiquid.

Most municipal securities trade infrequently. When municipal trades do occur, almost all of them occur in the first month after issuance. By the second month, trades drop off by as much as 70% and steadily decline from there. Once a bond finds its way into retail and institutional portfolios, it is likely to remain there. Individual investors usually buy and hold to maturity.

A dealer market. The secondary market for municipal securities is a dealer market, meaning that most purchases and sales come out of a dealer’s own inventory. If the dealer does not own the bonds itself, it will purchase the security from another dealer. When a broker is employed to make a trade, the broker will generally find a dealer to be the counterparty.

Dealers with large national firms operate in almost any segment of the municipals market. Smaller firms with a regional base are likely to specialize in specific sectors, such as public utility or transportation bonds, or specific geographical locations. They may operate with either in