Pre-trade Information in the Municipal Bond Market
July 12, 2018
Louis Craig, Abby Kim, and Seung Won Woo
Abstract:
This white paper documents wide variations in ATS dealer quotes across municipal bonds and examines the characteristics of bonds that dealers tend to quote more often. Dealer quotes represent the primary source of pre-trade information in the municipal bond market. Conditional on a bond being traded, the majority of bonds have pre-trade information. When quotes are posted, two-sided quotes are rare and offer quotes are more common than bids. While a large number of dealers quote some bonds each day, quoting activity in any individual bond on a given day is concentrated among a few dealers. We document variations in quote-based transaction cost measures and price improvement across bonds, and examine the characteristics of bonds that have higher costs. The majority of customer trades execute at worse prices than best available dealer quotes, which might indicate a lack of knowledge of existing quotes. These facts highlight the relative dearth of accessible pre-trade information in municipal bond markets.