WASHINGTON - Municipal securities trading activity on behalf of investors has remained relatively stable over the past several years even as dealer inventories plunged and the number of dealers declined.
The number of dealers has fallen by almost one-third since 2009, according to a Municipal Securities Rulemaking Board report released Tuesday, the first ever to analyze changes and trends in the customer trading activity of municipal securities dealers.
The data shows that trade activity and market size have been relatively stable in that period, though data from the Federal Reserve show that dealer inventories of municipal bonds have decreased by approximately 67 percent since 2006.
“Our analysis shows that most dealers that have exited the market provided little liquidity and participated in very few trades—typically fewer than 10 trades in a year,” said MSRB director of research Marcelo Vieira. “Meanwhile, the number of dealers with substantial municipal business—those executing more than 25,000 trades per year—has increased.”
The report evaluated muni market trends through two measurements: dealer participation and concentration of trades with dealers. Dealer participation is defined as the total number of dealers participating in municipal customer trades, whereas dealer concentration is defined as the market share of the 50 most-active dealers in terms of trading activity of customer trades in the municipal market.
The number of dealers has fallen by almost 32% over the past nine years, the MSRB report shows. There were 1,967 MSRB-registered dealers in 2009, and only 1,346 last year.
“Several factors have affected the number of registered dealers, including consolidation of broker-dealers and dealers exiting the municipal securities business,” the MSRB found.
The report details that the percentage of registered muni dealers executing 10 or fewer customer trades a year has gotten smaller as those firms have left the muni business altogether.
“Analysis shows that in 2006, 358 dealers, or 25%, executed 10 or fewer customer transactions in municipal securities,” the report said. “In 2017, this number declined to 157 dealers, or 18% of the total number of dealers transacting in customer trades. Dealers that executed more than 1,000 customer trades in 2006 represented 16% of the dealers, compared to 24% of dealers in 2017.”
Meanwhile, concentration of trades among the top dealers declined, the report showed. The top three dealers accounted for 29% of customer trades and 37% of customer par amount traded in 2006, compared to 24% in customer trades and 26% of customer par traded in 2017. Based on the number of customer trades, concentration in the top five firms fell to 35% last year from 42% in 2006.
“In general, a decline in dealer concentration — especially in the institutional market — may be favorable to investors because they are less reliant on a small number of dealers,” the MSRB said. “Less concentration can potentially mean that more dealers are competing for a customer’s business.”
The MSRB said it would continue to monitor these trends and provide periodic updates as needed.
