Letter to the Editor: Rebuttal to Markup Report Criticisms

Michael Decker's recent letter offers nine criticisms of our report on municipal bond markups. I briefly address his comments in the order they appear so your readers can evaluate his arguments fairly.

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Comments (4)
Craig McCann's study focuses on multiple trades that occur within minutes or hours but no more than one or two days of one another. I am a former muni trader and I have studied such price data myself endlessly. My findings are much the same as McCann's, moreover, they substantiate what all muni professionals know to be the basic reality of the market: Retail investors often bear unreasonable yield diminution caused by above-average or out-sized sales credits. And most knowledgeable professionals also know that this is because the practice of "net-yield" executions precludes transparency as to mark-ups. One possible way to force greater clarity is for the MSRB to require that all riskless dealer trades executed in fulfillment of "in-hand" customer orders be marked and processed as agency trades, with the sales credit disclosed to customers. As dealers have reduced their balance sheet commitments to muni inventory (indeed, some trader compensation schemes and the imminent Volcker Rule discourage "at-risk" trading), riskless trading has been steadily on the rise and riskless trades are, in reality, truly agency trades. It's disingenuous to mark such trades as principal when they are executed solely to match a customer order. Once sales credits are disclosed this way, it will be inevitable that credits will narrow, both for agency and for principal trades.
Posted by moconner7 | Monday, July 08 2013 at 12:01PM ET
To repeat:
Decker punches plenty of holes in the excessive markup study. It seems that Deng and McCann took a theory and found some facts that prove it.

As A.C. Doyle wrote:

Watson: Have you a theory to explain this strange case?

Holmes: My dear Watson, I have no data. It is a capital mistake to form a theory before seeing the data. Otherwise, one insensibly twists the data to fit the theory.

On the other hand, Decker supplies us with no contrary data, and no methodology to calculate legitimate markups.

Wilson White
Municipal Bond Expert Witness
Posted by wwilson | Thursday, June 27 2013 at 4:14AM ET
Sorry. That the cost of inventorying bonds is vanishingly small.
Posted by mrmuni12 | Monday, June 24 2013 at 1:51PM ET
The comment that the risk of inventorying bonds for short periods earns a sad, ironic chuckle in light of the market's behavior in recent weeks. It is particularly noteworthy that the authors would make such a comment without noticing what just happened.
Posted by mrmuni12 | Monday, June 24 2013 at 1:50PM ET
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