Secondary Market Participants
The municipal bond market is comprised of two marketplaces; the primary market and the secondary market. The primary market has been defined and explained by various authors in a multitude of investment industry publications that focus on the fixed income bond markets. The secondary market, however, has been afforded an average of one paragraph to one page of text in these same books. The dearth of information on the purpose and value that the secondary market plays in the support of the fixed income markets has ultimately led to a pervasive misunderstanding (public and regulatory) of market players and the specific roles they play within and in support of this marketplace.
The enormous task of underwriting, marketing and trading both the municipal bond primary and secondary markets is undertaken by broker/dealers ("dealers") and commercial banks ("dealer banks") throughout the United States. Dealers and dealer banks across the country maintain municipal bond departments that underwrite and trade local, state and national securities. Most dealers and dealer banks offer and trade a broad spectrum of investment instruments, including but not focused on municipal bonds. There are, however, some dealer firms that specialize and operate solely in the municipal securities industry.
Investment companies (known as wirehouses, super-regionals and regional firms, depending upon size) active in the municipal marketplace frequently specialize in specific sectors of the municipal industry. Some firms specialize in research, public finance, underwriting and/or financial advice to primary market players (ex. Municipalities), sometimes focusing their energies on one type of security such as Industrial Development bonds. Other dealers and dealer banks concentrate on the "retail" sector of the municipal industry, while still others focus on the "institutional" sector of the muni market, with all shops looking to make money on their "trading accounts".
The dealer community of today consists predominantly of dealers and dealer banks that are typically divided into two divisions: Retail and Institutional. When providing both retail and institutional service the dealers are otherwise known as "full service firms". Furthermore, there exists a class of dealers whose business is the trading of municipal bonds in the secondary market solely for profit; they do not buy and sell from internal customers. Rather they are professional traders, well-versed in the intricacies and nuances of conducting business in an industry with over 1.9 million outstanding issues. These shops use their knowledge of the municipal marketplace to look for profit opportunities. While to some this may sound like a predatory business model, these players, working in concert with all secondary market participants, add value and liquidity to the marketplace.
The first and last players in the secondary bond market are the individual and corporate investors, otherwise known as retail and institutional investors. The retail and institutional investors drive the secondary markets with their desire to buy and sell municipal securities subsequent to the primary offering and prior to the maturity date of their securities.
The retail market in the municipal bond industry refers to the servicing of individuals and smaller sized corporate or non-profit accounts. The retail account typically trades in amounts less than two hundred and fifty thousand dollars principal amount ($250,000 face value of bonds; written as 250m) and frequently traffics in quantities under 100m, or one-hundred thousand dollars principal amount. Firms that cover the retail sector of the municipal market employ professional traders and sometimes liaisons and trading assistants to assist the trading desk. Liaisons educate the dealer sales force on the fundamentals of municipal bonds, as well as how to market municipal products to their retail client base.
When referring to the institutional market within the municipal bond industry, we are speaking of larger valued accounts: bank portfolios, funds, large corporations and substantial Trust accounts. Institutional accounts traffic typically in amounts of 1000m (one million face value) and greater. Institutional traders are normally positioned within earshot of their institutional sales force, while the retail trader customarily has salespeople in many locations around the country. A retail trader at a wire house (large, full service investment company) will have thousands of salespeople across his region and/or the country, while an institutional trader usually works with four up to many dozen in his or her sales force, as well as his or her dealer sales force.
The next municipal bond secondary market participant is the dealer salesperson. Dealer salespeople sell the underwriting and trading department's inventoried positions to dealers and dealer banks, thus helping his traders and the firm move product. Dealer salespeople are employees of the firm looking for or offering securities and work within the trading department, ordinarily in immediate proximity to the trading staff. The dealer sales staff can be an effective marketing and sales arm of the trading department.
The fourth participant in the municipal bond secondary market, and the least well-known or understood, is the municipal securities broker's broker ("broker's broker"). Broker's brokers, sometimes referred to as interdealer brokers, are specialized securities companies that act as middlemen, agents working to effect transactions between principals (dealers and dealer banks). The broker's broker community distributes information and facilitates transactions in the municipal bond secondary market between dealers and dealer banks across the nation.