Skip to main content
SpringerLink
Log in
Book cover

Complex Systems in Finance and Econometrics pp 93–115Cite as

Corporate and Municipal Bond Market Microstructure in the U.S.

  • Reference work entry

Article Outline

Glossary

Definition of the Subject

Introduction

Early Corporate and Municipal Bond Market Microstructure Research

Fixed Income Pricing Service (FIPS) Research

Municipal Bond Market Research

Transaction Reporting and Compliance Engine (TRACE) Research

The Links Between Bond Market Microstructure Research and Other Finance and Economics Research

Bibliography

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   599.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Hardcover Book
USD   549.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Abbreviations

ABS:

Automated Bond System. The original automated limit-order market for bonds operated by the NYSE that executed orders according to strict price/time priority. ABS was replaced by the NYSE Bonds Platform in 2007.

Agency trade:

A bond transaction executed by a broker‐dealer on behalf of another party. A broker‐dealers is compensated by a commission on an agency trade.

Broker:

A firm that acts as an intermediary by executing agency trades.

Broker‐dealer:

A firm that engages in both agency trades and principal trades.

Broker's broker:

A broker‐dealer that exclusively executes agency trades of municipal bonds with other broker‐dealers. Broker's brokers do not execute principal trades and they do not trade directly with public investors.

Commission:

A form of compensation that a customer pays a broker‐dealer for executing an agency trade. Broker‐dealers must explicitly disclose the commission to the customer as a separate item on the customer's trade confirmation.

Dealer:

A firm that engages in principal trades for its own account.

FINRA:

Financial Industry Regulatory Authority. The self‐regulatory organization (SR0) created in July 2007 from the consolidation of NASD and the member regulation, enforcement and arbitration functions of the NYSE. FINRA rules are approved by the SEC and enforced by themselves.

FIPS:

Fixed Income Pricing Service. The electronic system operated by the National Association of Securities Dealers (NASD) from 1994 through 2002 to collect and disseminate real-time quotations and hourly trade reports for a subset of high-yield corporate bonds. FIPS was retired in July 2002 with the implementation of TRACE.

Market maker:

A specific designation made by a regulatory authority for a broker‐dealer that holds itself out to trade securities by publishing regular or continuous quotations to buy (bid) or sell (offer). Currently, there are no broker‐dealers regulated as market makers in the US corporate or municipal bond markets.

Mark-up and mark-down:

A form of compensation that a customer pays a broker‐dealer for executing a principal trade. Customers pay a mark-up when they buy a bond from a broker‐dealer; they pay a mark-down when they sell a bond to a broker‐dealer. Unlike commissions, mark-ups and mark-downs do not need to be disclosed on customer trade confirmations.

MSRB:

Municipal Securities Rulemaking Board. The self‐regulatory organization (SRO) charged with primary rulemaking authority over broker‐dealers in connection with their municipal bond transactions. MSRB rules are approved by the SEC and enforced by FINRA (formerly NASD).

NASD:

Formerly known as the National Association of Securities Dealers. The self‐regulatory organization (SRO) charged with, among other things, primary rulemaking authority over broker‐dealers in connection with their corporate bond transactions. In July 2007, NASD and the member regulation, enforcement and arbitration functions of the NYSE consolidated to form FINRA.

NYSE:

New York Stock Exchange. Operates the NYSE Bonds Platform (formerly ABS) trading system for exchange‐listed corporate bonds.

OTC securities:

Over the‐counter securities. Securities that are not traded on an organized exchange.

Principal trade:

A bond transaction executed by a broker‐dealer for its proprietary account. The broker‐dealer is compensated by a mark-up or mark-down on a principal trade.

Riskless principal trade:

A principal trade in which a broker‐dealer purchases a bond to satisfy a previously received order to buy, or a broker‐dealer sells a bond to satisfy a previously received order to sell. The transaction is riskless to the broker‐dealer because the firm does not bear any inventory (price) risk.

RTTRS (or TRS):

(Real‐Time) Transaction Reporting System. MSRB's municipal bond transaction reporting and dissemination system.

Serial offering:

A bond issuance in which several different bonds are offered with different, often consecutive, maturities. Municipal bonds are typically issued in serial offerings.

SRO:

Self‐regulatory Organization. A non‐governmental industry association that has statutory authority to regulate members through the promulgation and enforcement of rules and regulations governing business practices. The SEC oversees SRO activities and approves SRO rules.

SEC:

US Securities and Exchange Commission. The primary governmental overseer and regulator of US securities markets, including the corporate and municipal bond markets. Broker‐dealers and SROs are overseen by the SEC's Division of Trading and Markets (formerly Division of Market Regulation).

TRACE (formerly NASD TRACE):

Transaction Reporting and Compliance Engine. FINRA's corporate bond transaction reporting and dissemination system.

Bibliography

Primary Literature

  1. Alexander G, Edwards A, Ferri M (2000a) The determinants of trading volume of high-yield corporate bonds. J Financ Mark 3:177–204

    Article  Google Scholar 

  2. Alexander G, Edwards A, Ferri M (2000b) What does Nasdaq’s high-yield bond market reveal about bondholderstockholder conflicts? Financ Manag 29:23–39

    Google Scholar 

  3. Amihud Y, Mendelson H (1986) Asset pricing and the bid-ask spread. J Financ Econ 17:223–249

    Article  Google Scholar 

  4. Amihud Y, Mendelson H (1991) Liquidity, maturity, and yields on US Treasury securities. J Financ 46:1411–1425

    Article  Google Scholar 

  5. Barclay M, Hendershott T, Kotz K (2006) Automation versus intermediation: Evidence from Treasuries going off the run. J Financ 61:2395–2414

    Article  Google Scholar 

  6. Bernhardt D, Dvoracek V, Hughson E, Werner I (2005) Why do larger orders receive discounts on the London Stock Exchange? Rev Financ Stud 18:1343–1368

    Article  Google Scholar 

  7. Bessembinder H, Maxwell W, Venkataraman K (2006) Optimal market transparency: Evidence from the initiation of trade reporting in corporate bonds. J Financ Econ 82:251–288

    Article  Google Scholar 

  8. Biais B, Glosten L, Spatt C (2005) Market microstructure: A survey of microfoundations, empirical results, and policy implications. J Financ Mark 8:217–264

    Article  Google Scholar 

  9. Biais B, Green R (2005) The microstructure of the bond market in the 20th century. Working paper, Carnegie Mellon University

    Google Scholar 

  10. Blume M, Keim D, Patel S (1991) Returns and volatility of low-grade bonds. J Financ 46:49–74

    Article  Google Scholar 

  11. Carlin B (2007) Strategic price complexity in retail financial markets. Working paper, UCLA

    Google Scholar 

  12. Chakravarty S, Sarkar A (2003) Trading costs in three US bond markets. J Fixed Income 13:39–48

    Article  Google Scholar 

  13. Chen L, Lesmond D, Wei J (2007) Corporate yield spreads and bond liquidity. J Financ 52:119–149

    Article  Google Scholar 

  14. Cornell B, Green K (1991) The investment performance of low-grade bond funds. J Financ 46:29–48

    Article  Google Scholar 

  15. Collin-Dufresne P, Goldstein R, Martin S (2001) The determinants of credit spread changes. J Financ 41:2177–2207

    Article  Google Scholar 

  16. Downing C, Zhang F (2004) Trading activity and price volatility in the municipal bond market. J Financ 59:899–931

    Article  Google Scholar 

  17. Edwards A, Harris L, Piwowar M (2007) Corporate Bond Market Transaction Costs and Transparency. J Financ 62:1421–1451

    Article  Google Scholar 

  18. Elton E, Green C (1998) Tax and liquidity effects in pricing government bonds. J Financ 53:1533–1562

    Article  Google Scholar 

  19. Fenn G (2000) Speed of issuance and the adequacy of disclosure in the 144a high-yield debt market. J Financ Econ 56:383–405

    Article  Google Scholar 

  20. Goldstein M, Hotchkiss E, Sirri E (2007) Transparency and liquidity: A controlled experiment on corporate bonds. Rev Financ Stud 20:235–273

    Article  Google Scholar 

  21. Green R (2007) Issuers, underwriter syndicates, and aftermarket transparency. Presidential Address to the American Finance Association

    Google Scholar 

  22. Green R, Hollifield B, Schurhoff N (2007a) Financial intermediation and the costs of trading in an opaque market. Rev Financ Stud 20:275–314

    Article  Google Scholar 

  23. Green R, Hollifield B, Schurhoff N (2007b) Dealer intermediation and price behavior in the aftermarket for new bond issues. J Financ Econ 86:643–682

    Article  Google Scholar 

  24. Harris L (2003) Trading and exchanges: market microstructure for practitioners. Oxford University Press, New York

    Google Scholar 

  25. Harris L, Piwowar M (2004) Municipal bond liquidity. Working paper, Available at SSRN: http://ssrn.com/abstract=503062

  26. Harris L, Piwowar M (2006) Secondary trading costs in the municipal bond market. J Financ 61:1361–1397

    Article  Google Scholar 

  27. Hasbrouck J (1993) Assessing the quality of a security market: A new approach to transaction-cost measurement. Rev Financ Stud 6:191–212

    Article  Google Scholar 

  28. Helwege J, Turner C (1999) The slope of the credit yield curve for speculative-grade issuers. J Financ 54:1869–1884

    Article  Google Scholar 

  29. Hong G, Warga A (2000) An empirical study of bond market transactions. Financ Anal J 56:32–46

    Article  Google Scholar 

  30. Hong G, Warga A (2004) Municipal marketability. J Fixed Income 14:86–95

    Article  Google Scholar 

  31. Hotchkiss E, Ronen T (2002) The informational efficiency of the corporate bond market: An intraday analysis. Rev Financ Stud 15:1325–1354

    Article  Google Scholar 

  32. Hotchkiss E, Warga A, Jostova G (2002) Determinants of corporate bond trading: A comprehensive analysis. Working paper, Boston College

    Google Scholar 

  33. Huang R, Stoll H (1997) The components of the bid-ask spread: A general approach. R Financ Stud 10:995–1034

    Article  Google Scholar 

  34. Kalimipalli M, Warga A (2002) Bid/ask spread, volatility and volume in the corporate bond market. J Fixed Income 12:31–42

    Google Scholar 

  35. Karolyi GA (2004) The world of cross‐listings and cross‐listings of the world: Challenging conventional wisdom. Working paper, Ohio State University

    Google Scholar 

  36. Lesmond D, Ogden J, Trzcinka C (1999) A new estimate of transaction costs. Rev Financ Stud 12:1113–1141

    Article  Google Scholar 

  37. Levitt A (1998) The importance of transparency in America’s debt market. Remarks at the Media Studies Center, New York, September 9, 1998

    Google Scholar 

  38. Madhavan A (2000) Market microstructure: A survey. J Financ Mark 3:205–208

    Article  Google Scholar 

  39. Madhavan A, Richardson M, Roomans M (1997) Why do security prices change? A transaction-level analysis of NYSE stocks. R Financ Stud 10:1035–1064

    Article  Google Scholar 

  40. Reiss P, Werner I (1996) Transaction costs in dealer markets: Evidence from the London Stock Exchange. In: Lo A (ed) The industrial organization and regulation of the securities industry. University of Chicago Press, Chicago

    Google Scholar 

  41. Sarig O, Warga A (1989) Bond price data and bond market liquidity. J Financ Quant Anal 24:367–378

    Article  Google Scholar 

  42. Schultz P (2001) Corporate bond trading costs: A peek behind the curtain. J Financ 56:677–698

    Article  Google Scholar 

  43. Shilony Y (1977) Mixed pricing in oligopoly. J Econ Theory 14:373–88

    Article  Google Scholar 

  44. Warga A (1991) Corporate bond price discrepancies in the dealer and exchange markets. J Fixed Income 1:7–16

    Article  Google Scholar 

  45. Warga A (1992) Bond returns, liquidity and missing data. J Financ Quant Anal 27:605–616

    Article  Google Scholar 

Books and Reviews

  1. Greene W (1993) Econometric Analysis, 2nd edn. Macmillan, New York

    Google Scholar 

  2. O’Hara M (1997) Market microstructure theory. Basil Blackwell, Cambridge

    Google Scholar 

  3. Shultz B (1946) The securities market and how it works. Harper, New York

    Google Scholar 

  4. US Securities and Exchange Commission (2004) Report on transactions in municipal securities. http://www.sec.gov/news/studies/munireport2004.pdf

Speeches, Public Statements, and Testimony by US Bond Market Regulators and Participants

  1. September 9, 1998, The Importance of Transparency in America’s Debt Market, Remarks of SEC Chairman Arthur Levitt at the Media Studies Center, New York, NY, http://www.sec.gov/news/speech/speecharchive/1998/spch218.htm

  2. April 23, 1999, Remarks of SEC Chairman Arthur Levitt Before the Bond Market Association, San Francisco, CA, http://www.sec.gov/news/speech/speecharchive/1999/spch268.htm

  3. October 28, 1999, Electronic Trading Technology’s Impact on the Fixed‐Income Markets, Remarks of SEC Commissioner Laura S. Unger at The Bond Market Association, Fifth Annual Legal and Compliance Seminar, New York, NY, http://www.sec.gov/news/speech/speecharchive/1999/spch313.htm

  4. January 8, 2002, Remarks Before the Bond Market Association Legal and Compliance Conference, by Annette L. Nazareth, SEC Director, Division of Market Regulation, http://www.sec.gov/news/speech/spch532.htm

  5. April 25, 2002, Remarks Before the Annual Meeting of the Bond Market Association, by SEC Chairman Harvey L. Pitt, New York, NY, http://www.sec.gov/news/speech/spch553.htm

  6. February 3, 2004, Legal & Compliance Conference – The Bond Market Association, by SEC Commissioner Cynthia A. Glassman, New York, NY, http://www.sec.gov/news/speech/spch020304cag.htm

  7. June 17, 2004, US Senate Committee on Banking, Housing, and Urban Affairs, Hearing on “An Overview of the Regulation of the Bond Markets”, http://banking.senate.gov/public

  8. September 9, 2004, Remarks before the 2004 Bond Attorney’s Workshop of the National Association of Bond Lawyers, by Martha Mahan Haines, SEC Assistant Director, Office of Municipal Securities, Division of Market Regulation, Chicago, IL, http://www.sec.gov/news/speech/spch090904mmh.htm

  9. October 1, 2004, Keynote Address before the NASD Conference on Fixed Income Markets, by Annette L. Nazareth, SEC Director, Division of Market Regulation, New York City, NY, http://www.sec.gov/news/speech/spch100104aln.htm

  10. December 16, 2004, Second MTS Conference on Financial Markets: “The Organization and Performance of Fixed‐Income Markets”, by Chester Spatt, SEC Chief Economist and SEC Director, Office of Economic Analysis, Vienna, Austria, http://www.sec.gov/news/speech/spch121604cs.htm

  11. February 1, 2005, Remarks before the Bond Market Association 2005 Legal & Compliance Conference, by SEC Commissioner Paul S. Atkins, New York, NY, http://www.sec.gov/news/speech/spch020105psa.htm

  12. February 2, 2005, Keynote Address at the Bond Market Association 2005 Legal & Compliance Conference, by NASD Vice Chairman Doug Shulman, New York, NY, http://www.finra.org/PressRoom/SpeechesTestimony/DouglasShulman/P013225

  13. April 20, 2005, Remarks before the Bond Market Association, by SEC Chairman William H. Donaldson, New York, NY, http://www.sec.gov/news/speech/spch042005whd.htm

  14. April 20, 2005, Navigating the Changing Climate in Fixed‐Income Products, Remarks of NASD President Doug Shulman before the Bond Market Association, New York, NY, http://www.finra.org/PressRoom/SpeechesTestimony/DouglasShulman/P013842

  15. May 6, 2005, Broad Themes in Market Microstructure, by Chester Spatt, SEC Chief Economist and SEC Director, Office of Economic Analysis, Cambridge, MA, http://www.sec.gov/news/speech/spch050605css.htm

  16. June 21, 2005, Developing Bond Markets in APEC: Key Lessons from the US Experience, Remarks of SEC Commissioner Roel C. Campos before the ABAC/ADBI/PECC Conference, Tokyo, Japan, http://www.sec.gov/news/speech/spch062105rcc-2.htm

  17. September 13, 2005, Remarks for Promethee: Transatlantic Dialogue and Regulatory Convergence: Panel on Financial Markets, by Ethiopis Tafara, SEC Director, Office of International Affairs, Paris, France, http://www.sec.gov/news/speech/spch091305et.htm

  18. September 15, 2005, Keynote Address before the 30th Bond Attorney’s Workshop of the National Association of Bond Lawyers, by SEC Commissioner Roel C. Campos, Chicago, IL, http://www.sec.gov/news/speech/spch091505rcc.htm

  19. November 17, 2005, Address by NASD President Doug Shulman to the NASD Fall Securities Conference, San Francisco, CA, http://www.finra.org/PressRoom/SpeechesTestimony/DouglasShulman/P015554

  20. January 6, 2006, Discussion: An Overview of Bond Market Transparency, by Chester Spatt, SEC Chief Economist and SEC Director, Office of Economic Analysis, Boston, MA, http://www.sec.gov/news/speech/spch010606css.htm

  21. February 7, 2006, Remarks before the TBMA Legal and Compliance Conference, by SEC Commissioner Annette L. Nazareth, New York, NY, http://www.sec.gov/news/speech/spch020706aln.htm

  22. May 19, 2006, The Continuing Evolution of the Bond Market and Other Observations: Remarks Before the Bond Market Association’s 30th Annual Conference, by SEC Commissioner Cynthia A. Glassman, New York, NY, http://www.sec.gov/news/speech/2006/spch051906cag.htm

  23. May 19, 2006, Remarks Before the Bond Market Association’s 30th Annual Conference, by NASD President Doug Shulman, New York, NY, http://www.finra.org/PressRoom/SpeechesTestimony/DouglasShulman/P016651

Miscellaneous Sources of Information on International Corporate Bond Markets

  1. April, 2004, Markets in Financial Instruments Directive (MiFID), Directive 2004/39/EC of the European Parliament and of the Council, Article 65, http://europa.eu.int/eur-lex/pri/en/oj/dat/2004/l_145/l_14520040430en00010044.pdf

  2. May 2004, International Organization of Securities Commissions (IOSCO), “Transparency of Corporate Bond Markets”, Report of the Technical Committee of IOSCO, http://www.iosco.org/library/pubdocs/pdf/IOSCOPD168.pdf

  3. September 2005, UK Financial Services Authority (FSA), “Trading Transparency in the UK Secondary Bond Markets”, FSA Discussion Paper 05/5, http://www.fsa.gov.uk/pubs/discussion/dp05_05.pdf

  4. November, 2005, “Developing Bond Markets in Asia Conference”, jointly by the Asian Office of the Bank for International Settlements (BIS) and the People’s Bank of China (PBC), Kunming, China, http://www.bis.org/publ/bppdf/bispap26.htm

  5. May 2006, Centre for Economic Policy Research (CEPR), “European corporate bond markets: Transparency, liquidity, efficiency”, http://www.cepr.org/PRESS/TT_CorporateFULL.pdf

Download references

Author information

Authors and Affiliations

  1. Securities Litigation and Consulting Group, Inc., Fairfax, USA

    Michael S. Piwowar

Authors
  1. Michael S. Piwowar
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. RAMTECH LIMITED, 122 Escalle Lane, Larkspur, CA, 94939, USA

    Robert A. Meyers Ph. D. (Editor-in-Chief) (Editor-in-Chief)

Rights and permissions

Reprints and permissions

Copyright information

© 2009 Springer-Verlag

About this entry

Cite this entry

Piwowar, M.S. (2009). Corporate and Municipal Bond Market Microstructure in the U.S.. In: Meyers, R. (eds) Complex Systems in Finance and Econometrics. Springer, New York, NY. https://doi.org/10.1007/978-1-4419-7701-4_6

Download citation

  • DOI: https://doi.org/10.1007/978-1-4419-7701-4_6

  • Publisher Name: Springer, New York, NY

  • Print ISBN: 978-1-4419-7700-7

  • Online ISBN: 978-1-4419-7701-4

  • eBook Packages: Business and Economics

Publish with us

Policies and ethics

Search

Navigation