U.S. muni market poised for real-time pricing

NEW YORK, Feb 11 (Reuters) - The U.S. municipal bond market is poised for radical improvement in price transparency that regulators say will help stop excessive markups routinely charged some retail investors.

Price gouging of small investors that traditionally had little or no means of knowing how much a muni bond should cost on a given day has been the eternal black eye of the $1.9 trillion tax-exempt bond market.

The muni market is scheduled to adopt real-time price reporting in January 2005, and real-time disclosure sometime after that. The market has had full next-day price reporting since June 2003.

Next-day reporting has made it much easier for regulators to watch muni dealers. It includes precise detail on which dealers trade which bonds.

"With increased transparency, we've been monitoring more," Martha Haines, director of the Office of Municipal Securities at the Securities and Exchange Commission, told Reuters.

For example, on Feb. 10 bonds issued by the Florida State Board of Regents were purchased from an investor at 89 cents on the dollar or $4,450 per bond. Identical bonds were sold to another investor at 102 cents on the dollar or $5,100 per bond. This resulted in a 13 point or roughly a $650 difference in the price two investors saw the same day on the same bond.

Regulators said real-time pricing will further improve their radar screen of the muni market. Perhaps more importantly, it will raise the bar substantially on what is considered acceptable dealer conduct, regulators said.

"Until we start real-time price transparency, brokers may not know what is going on within a particular day on trading of a particular bond," Haines said.

Real-time price reporting and disclosure would be the end to a long fight between regulators and dealers over transparency.

"I sincerely hope I will be the last SEC commissioner to have to argue for increased transparency in the bond markets," Cynthia Glassman said in prepared remarks to a Bond Market Association conference last week.

HOW MUCH IS TOO MUCH? There are no stated commissions in the muni market. Dealers buy at one price and hope to sell at a higher price. What is excessive is subject to interpretation.

At least a fourth of muni bonds that trade more than once a day may carry an excessive markup, said long-time market critic Kevin Olson.

"My red flags are still showing the muni market is no better than the secondary market for vacation timeshares," said Olson, a former bond trader and proprietor of http://www.municipalbonds.com.

Olson uses his Web site to publicize the widest spreads in the muni market on a daily basis.

The proportion of dubious trades would likely be much higher if there were a way to judge the prices of bonds that only traded once in a day, Olson said.

Anywhere from a fourth to a half of all trades in the muni market on a given day are on bonds that change hands only once that day, according to market data.

Regulators, with access to more complete market data, said excessive markups are inexcusable but nonetheless a limited problem in a big market.

The market averages 30,000 trades a day and about 30 of them look questionable, according to Christopher Taylor, executive director of the Municipal Securities Rulemaking Board. Some of these trades may have a reasonable explanation, such as breaking news that sparks a big price move, he said.

"Less than 1 percent of trades appear to present problems," Haines said. "We are concerned regardless of the proportion. They all should be done at reasonable prices."