Municipal bonds may be purchased in the initial offering of the bonds, typically
through broker-dealers or banks that underwrite the bonds or assist the underwriters
to distribute the newly issued bonds (a "primary market" transaction), or in the
"secondary market" following the initial issuance. Virtually all buying and selling
by customers occurs with the assistance of broker-dealers or banks who are subject
to MSRB rules, although occasionally an issuer may establish special direct-to-investor
bond offerings that allow investors to purchase directly from the issuer.
New Issue Transactions—In new issues, list offering prices
typically are disclosed as the prices at which a substantial portion of the issue
was offered to the public. Thus, many – but by no means all – primary market trades
during the initial distribution of a new issue will occur at this list offering
price. The issuer’s official statement is intended specifically for new issue customers
and serves as the primary source of information about the issuer and the securities
for primary market transactions.
Under MSRB rules, underwriters are required to provide copies of the official statement
to new issue customers and to submit the official statement to the MSRB. In addition,
any amendments or supplements prepared by the issuer during the first 25 days after
the initial issuance also must be submitted by the underwriter to the MSRB. Official
statements and amendments or supplements are publicly available through EMMA. For
securities that are in the new issue period, EMMA provides an indicator flag and
also allows the public to request to be notified if the official statement or any
amendment or supplement has been posted on EMMA for such new issue.
Secondary Market Trades—Most municipal securities trades
occur in the secondary market. In effect, investors who buy municipal bonds in the
initial public offering may choose to sell the bonds rather than to hold the bonds
until maturity. This generally serves as the beginning of secondary market trading
in such bonds.
There are approximately 60,000 different issuers of municipal securities, and many
of these issuers may issue different types of securities. This wide array of choices
in the municipal market contrasts sharply with the corporate market, where the number
of issuers and issues is much smaller. Due largely to this extraordinary variety,
municipal bonds have historically traded in an "over-the-counter" market, rather
than on an exchange, and the vast majority of municipal bonds are not traded on
a regular basis. Unlike when investing in stock through an exchange where the investor
can buy the securities of a specific company at any time due to the general availability
of shares for sale, an investor seeking to invest in a specific municipal bond is
not likely to easily find a ready seller of that specific bond, with limited exceptions
for some large more actively traded issues. It is much more common to identify basic
characteristics of a municipal bond in which an investor is interested in investing
(e.g., state, credit worthiness, maturity range, interest rate or yield, market
sector, etc.) and then to make a choice from among a set of municipal securities
then available for purchase that meet those criteria.
Principal Trades—Historically, when a customer buys or sells
a municipal bond, that trade occurs with a broker-dealer or bank acting as the other
party, or "counter-party," in a "principal" trade. An investor may purchase a bond
out of "inventory," meaning bonds that the broker-dealer or bank already owns with
the expectation of later selling, or the broker-dealer or bank may acquire the bond
from another broker-dealer, bank or investor for resale to its customer. Principal
trades are usually done without a commission charge, with the broker-dealer or bank
instead realizing profit or loss through the purchase by the broker-dealer or bank
of the security and the re-sale of that security at a higher price to the customer.
Agency Trades—Agency trades, where the broker-dealer or bank
is an intermediary between the buyer and seller and does not take ownership of the
securities, are much less common in the municipal securities market. For one thing,
it is often difficult to find someone interested in buying a specific municipal
bond just when someone else is interested in selling that bond. A broker-dealer
or bank typically charges a commission when serving as an agent between two counter-parties
to a trade.