GAO Report: Retail Municipal Bond Traders Ripped Off

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








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.


  1. stan says

    It probably costs a firm about $150 to clear a trade on both sides (buying it from another dealer and selling it to the investor) irrespective of the size of the trade so $150/$5000=3%. I am at a lose as to where the ripoff lies? $150/$100,000=.15%. If the investor holds the bond for 10 years and buys no other security, they will pay more in account fees than they did in sales commissions (9 years times $35 to $50.) Are you in the education mode or the attack mode?

    • davidwaring says

      Hi Stan,

      Thanks for reading and for your comment. For us it seems that paying 3% to get a trade done when that is close to a full year’s worth of interest for most bonds is an unfair cost for the individual investor. It also seems that while other markets have leveraged technology to drive costs down for the individual investor, the bond market is still stuck in the ice age in that regard. Hopefully that will start to change in the near future.


      • Alex says

        Unfortunately, due to the less liquid nature of the market, you can’t really expect the bid-ask spread, and costs, to ever come down to where equities are. If these 1-2% markups are from full service brokerage firms, they are about what you can expect, and I would argue they are fair. They provide much more of a service than DIY options like Schwab and TD. If you’re a sophisticated investor, of course you could go to Schwab and have a lower cost. But when you’re at the Merrills and the Morgans and the Goldmans of the world, and you have a team of people holding your hand who (should) have your best interests at heart, well then, you pay more. I would never recommend someone with no investing experience to go and start buying bonds on their own without doing some due dilly. Pay the 1-2% and hold until maturity. On a 5 or 10 year bond it’s negligible if you amortize the cost.

    • Seth says

      Hi Stan. Where are you getting the figure from regarding the cost of $150 to clear a trade? charges a fee of $10.95 per transaction (no minimum or maximum size) over the automated bonddesk platform. They do have municipal bond specialists to review each trade to ensure that there are no issues ( for example, if the bond is called, in technical default, that the price is reflective of current market transactions, etc.). Fidelity, Schwab, TD Ameritrade also charges small fees to transact municipal bonds through similar automated systems.

      I would be interested in your views on this matter. I have been purchasing municipal bonds for 27 years and now much more information is available to the retail investor due to the information that is available over the internet. I have not read the GAO report, but I will because I have seen many trades that exceed an appropriate mark-up (even exceeding the 5% maximum that is suggested in the MSRB rules).

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