What follows is a transcript of the video above
Municipal bonds are traded in the over-the-counter market. They do not trade on exchanges. Overall, the municipal bond market is way more thinly traded. There are so many different issues when you think about school districts and small municipalities that are abundant throughout our country, just imagine the number of different types of municipal issues, and not all of them have a very strong market. The conventions for quoting and the terminology that is used in quoting these bonds can be very different because of that market.
What Are Bona Fide Quotes?
This term is used when municipal language simply means that that quote is going to be a firm quote. If it is published, it means that that broker-dealer is going to stand behind it and be willing to do business at that quote. Now there are rules around Bona Fide quotes. NSRB says if a firm is going to make a Bona Fide quote, it must be reflective of current market conditions. They cannot just pull a quote from nowhere and make it up, they must make that quote relevant to the current market, and make sure it is fair and reasonable. Think about the two terms, fair and reasonable, as being very reflective of the NSRB’s requirements.
A workable indication reflects a bid price at which a dealer will purchase securities from another dealer. Say there is a thinly traded market, you as a potential customer go to a market maker and says, “Hey, I think we want this bond. What can you offer me? Or at what price could I sell it?” And the response is, “Well, we think we may be able to do it at a certain price.” That is a workable indication, and it is not firm, it could change based on market conditions.
Out-Firm with Recall
An out-firm with recall, we have this very different type of market where sometimes what you want is not readily available. Let’s say you are a customer, and you are coming to my firm, you have determined that you want a certain type of bond. I will say, “Okay, I’ll go out and look for it.” I find that bond. I called you, the customer, and said, “I got the bond at this price, and I will give you an out-firm with recall quote.”
This quote is a firm quote. But here is the difference: If another customer comes to me in the meantime, I can sell it to that customer, but only after giving you the first opportunity to buy it. So usually with one of these quotes, it is firm for an hour to the original customer. In other words, they have an hour to make up their mind. If they do not make up their mind within that hour, it can be sold to someone else, or the price could change. If during that hour, another customer comes into the picture, what happens is, the firm is going to call you and say, “By the way, you’re going to have to make up your mind because we have another customer.”
Five- Minute Recall
A five-minute recall means you have a set period of time, 5 minutes in this case, to make up your mind. Realize that this special type of process called “the out-firm quote” is something used in the municipal market only, and it is still considered a firm quote.