Electronic Muni Bond Trading: Better than 2 Cans on a String


In order to research an upcoming piece on which broker has the best bond research, I opened small accounts at the 4 largest electronic brokers, each with $1000.  Because the process is easier for personal accounts than it is for company accounts, I opened the accounts with personal money.  Somewhere in the process my business partner and Learn Bonds publisher Marc Prosser got interested, so I gave him the login to one of the accounts so he could look around a bit.

Later on that same day I asked him what he thought and he said “oh yeah I forgot to tell you I placed a municipal bond trade on your account so we could see how it works with xyz broker.” (I have omitted the name here since I don’t get the sense that my experience would have been any better with the other brokers.)  Since I only had $1000 in the account, I found it a little strange that he was even able to place a bond trade, but with that amount of money and the small amount that the muni market moves, I wasn’t worried about it.

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A few days later I asked Marc  what he wanted to do with the muni trade, and he said go ahead and close it out and if there is a loss just book it to the company. So, after logging into the account I see the following bond:


You bought      5,000.000       $108.41100        Transaction amount: -$5,420.55

So my first thought is that it looks like there are 5 bonds in my account not the 1 that I was expecting.  But after looking in the P/L column of the platform I was happy to see that we were actually up $75 or so on the trade.  No problem right?

So I go to click to close the position and I get a message that says “please call the fixed income desk to close this position”.  I know from past experience trading other markets that anytime you have to call a trading desk to be executed on a trade, the likelihood of getting screwed goes up exponentially.  We were able to get into the trade electronically with no problem, but now that we are in the trade and at the mercy of the trading desk, we have to call them to get out?  Hmmm.

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But anyways we are “up money” on the trade (according to the platform at least) so I didn’t stress about it and called the fixed income desk.  The person that I spoke with was actually very nice.  He basically told me that we had bought a new issue bond.  Since the bond had not settled yet and I didn’t want the trade, he said that if I called back tomorrow (it was late in the day at that point) they may have another investor that wants the bonds and can get me out of the trade. Sounds great!

So the next morning I call back and explain the situation again.  The response I get is less optimistic this time.  Not only can I not get out of the trade, since the trade will not settle for another few days I can’t even close the trade out.  (The bond we bought was part of a retail order period which is why the settlement was longer than normal.)  Furthermore since we placed a 5 bond trade and there is only $1000 in my account I have to send in another $4500 to cover the difference.  You can learn more about retail order periods here.

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After expressing a little frustration and getting no good explanation as to why we were even able to place this trade with only $1000, I got off the phone and marked my calendar to call back the day the trade settles.  It was also curious to me how I could be showing a floating profit on the platform but not have the ability to close the trade, but the guy didn’t seem like he was in the mood for explanations so I let him be.

So I call back in a few days to close the trade, explain the situation again, and the trader says “let me check and see if we have a buyer”.  After a brief hold he comes back on the line and says that they do not have a ready buyer so he needs to shop the trade.  If I “call him back in 30 minutes” he should have a buyer.

I call back in 30 minutes and they had a buyer at 106.84.  Now I really have no idea how good of a price that is but as I can’t exactly call someone else and see if they want to give me a better price since my bond is held with that broker.  I also don’t recall what price was showing on the platform at that time but I do remember that it was a good bit better than 106.84.  Since we are talking about less than $100 however and because I don’t really have much choice, I say ok lets do the trade.

Next he tells me that if I do it over the phone with him then its a $20 commission but if I do it online then its $8.

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  1. I find this to be a strange article for a site that purports to educate the public in financial topics, including municipal bonds. First of all, there is a minimum denomination rule, which means that you cannot purchase bonds in less than 5,000 increments, so you could not have had an order filled for 1,000. Secondly, NEVER share you account ID and password with anyone. Third, fixed income securities are typically valued by a third party vendor using its proprietary algorithm. It is unlikely you would ever get that exact amount, as it may be higher or lower than what someone is willing to pay at any particular time. To see recent trades, if any, check EMMA at emma.msrb.org. This will give you an idea of the market, but no guarantee you will get a similar price. Typically, smaller lots will not get as good as execution as larger lots. Fourth, the extended settlement is not because you bought it during the retail order period, it is because it is a new issue. Institutional investors also have the same settlement date. This leads into why you could buy with only $1000 in your account — just like any other security, you have until settlement date to pay for the securities you purchased.

  2. You are trading an investment that was stipulated by the issuer to give priority to retail INVESTORS. The underwriter told the issuer that that was what you were doing. By trying to close (sell) the bond you became what is known as a flipper even though it didn’t work out for you. Had you bought a million dollars face you might have made money but since you bought the most expensive trade in the muni market, the trade cost killed you. Retail order periods are established to encourage investors that buy and hold versus trade the positions for a quick profit. The underwriter did you a favor and you turned on him/her. Now you expect good treatment?


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