Secondary Market

The main purpose of the secondary market is to provide liquidity for municipal bonds to institutional and individual investors. Within the secondary market, they are able to sell a municipal security after its initial offering but before its maturity date. Investors use the secondary market to maximize their returns. Because of the existence of the secondary market and the liquidity it provides, there is more security and faith in the primary market, leading to an increase in issues.

Breakdown of the Secondary Market

The two main categories that encompass the secondary market are the exchange market and the over-the-counter market. In the exchange market, public corporations that meet certain capitalization requirements may buy, sell, and trade. In the over-the-counter market, dealers execute orders for individual clients.

Operations within the Secondary Market

Traditionally, over-the-counter market orders were taken by phone. With the advent of the internet and increased technology, orders may now be taken via computer. However, the mere fact that the orders are taken from Electronic Trading Systems (ETS) isn�t the only way that the market has been affected by technology. The internet and ETS’s now offers investors a vast array of tools to help them maximize their returns and effectively track all their investments. New technology has not only revolutionized the municipal bond market, but the entire financial industry in general, particularly by giving more power to the individual investor.

Who Partakes in the Secondary Market?

Within the secondary market, municipal bond traders and municipal bond brokers (the ‘broker’s brokers’) handle the main operations. They are the ones on the trading floor making the orders to buy, sell, or trade. These traders and bond brokers operate in two different realms. Some act to represent institutional firms that are looking to invest while others are placing orders for the individual investor.

How Does a Trade Take Place?

As in most over-the-counter markets, trading a municipal bond works under the principle of bid-and-offer. Quite simply, the dealers will offer a price to the market. The investors will then either buy at that price, or try to bid for a higher yield (more interest). All relevant information, including the name of the bonds, the coupon rate, maturity date, yield or dollar price, and CUSIP number, is exchanged between the seller and the buyer.