Same-Day Markup and Best Execution on a Municipal GO Trade
You are the municipal securities principal reviewing same-day trades. A customer sold $1,000,000 face amount of 4% GO bonds maturing in 2032 at 98.50. The firm immediately sold the same bonds to a retail customer at 99.75. The firm’s pricing service showed the bonds at 99.00. The confirmation to the retail customer disclosed the price but not the firm’s compensation. The trade was executed after the firm’s best-execution log showed an alternative bid of 98.90 from another dealer. The customer relationship began two weeks ago, and the rep’s file contains no suitability notes.
1. Evaluate the markup under G-30.
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The markup is 99.75 minus 98.50, or 1.25 points. On $1,000,000 face amount that is $12,500. The pricing service showed 99.00, and another dealer bid 98.90.
G-30 requires compensation to be fair and reasonable. A 1.25-point spread on a GO bond, when the market indication is 99.00, is high and requires justification. The principal should compare the spread to the firm’s markup policy, the bond’s liquidity, the size of the trade, and the services provided. Absent a documented rationale, the markup appears excessive.
Separately, G-30 requires disclosure of compensation on retail customer confirmations. The confirmation showed price but not the firm’s compensation, so that is a distinct deficiency.
2. Did the firm satisfy best execution under G-18?
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Probably not. The firm sold at 98.50 when another dealer bid 98.90. The difference is 0.40 points, or $4,000 on $1,000,000 face amount.
G-18 requires reasonable diligence to obtain the best execution price for the customer. The best-execution log shows a better alternative bid. The firm can rebut the conclusion only if it documents why the 98.50 execution was superior, for example speed, certainty of settlement, or a bona fide market condition. A bare assertion is insufficient. The principal should review the execution record and, if no valid rationale exists, treat the trade as a best-execution failure.
3. What remediation and recordkeeping steps should the principal require?
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The principal should:
- Recalculate the customer’s compensation and consider a price adjustment or refund if the markup is excessive.
- Correct the confirmation disclosure going forward.
- Review the rep’s file for suitability; the absence of notes is a G-19 documentation deficiency.
- Retrain the rep and the trading desk on G-18 and G-30.
- Preserve the trade tickets, pricing service data, best-execution log, and customer complaint records under G-8.
Documentation should show the review, the conclusion, and any customer remediation. A pattern of similar trades should trigger a broader supervisory review.