Municipal Securities Trading and Sales
Pricing and selling
The governing standard is fair dealing. MSRB Rule G-30 requires that markups and markdowns in principal transactions be fair and reasonable, measured from the prevailing market price - what the security is worth in the interdealer market - not from the dealer's own cost. Weigh the security's liquidity, the size and difficulty of the trade, the dealer's risk, and the services provided. There is no safe-harbor percentage; the old 5% guideline was withdrawn, so a 2% markup on a thinly traded name may be defensible while 1% on a liquid benchmark may not be. In riskless principal trades, the contemporaneous interdealer price is the benchmark.
Rule G-18 requires best execution: reasonable diligence to find the best market for the customer's order. Rule G-19 and Reg BI govern recommendations - reasonable-basis and customer-specific suitability, with heightened care for retail customers. Confirmations under Rule G-15 must show capacity (principal or agent), price, yield where applicable, CUSIP, settlement date, call features, and the remuneration charged. Rule G-20 limits gifts to $100 per person per year, and Rule G-21 restricts advertising and sales literature.
Traps
- Computing markup off inventory cost or off a same-day purchase price without confirming the market.
- Hunting for a bright-line percentage that no longer exists.
- Recommending a long, callable bond to a short-horizon customer without documenting suitability.
- Treating online or fee-based execution as exempt from fair-pricing review.
Worked example
A dealer buys bonds at 98.00 and sells them an hour later to a retail customer at 99.50. The markup is 1.50 points ($15 per $1,000). The principal should test 99.50 against what other dealers would charge, document the comparison, and be ready to defend it. If the market moved to 98.75 in the interim, the markup measured against the new prevailing price is larger than it first appears.