Individual investors don’t have it easy when it comes to knowing what their bonds are worth in the secondary market at any given time.
Unlike the equities markets, where most stocks are bought and sold on exchanges and other electronic platforms that are visible to participants, trading in muni bonds mostly takes place in an over-the-counter market that is less transparent and less liquid.
The municipal market doesn’t keep readily available and reliable tradable quotes on all outstanding credits, mostly because the issuers and the securities they bring to market are so varied, and because of the large number of securities outstanding and the infrequency with which the securities trade.
Municipal broker-dealers usually set the prices at which they are willing to trade by making relative assessments of a security’s market value.
To do so, they draw on various sources of information, some of which may be readily available but often are not, and are sure to adjust their compensation for executing trades accordingly.
Broker-dealers whom the Government Accountability Office interviewed for the report mentioned several factors that were relevant to their pricing determinations.
They included recent post-trade price information on the same or comparable securities; available pre-trade price information on the security or comparable securities; the characteristics and credit quality of the security; relevant market information, and the cost of trading the security.