McGraw Hill Financial's S&P Capital IQ has partnered with Tradeweb Direct to launch Odd-Lot Valuations, a pricing service that joins a growing number of efforts aimed at improving transparency in odd-lot bond trades.
The valuation service prices both odd-lot municipal and corporate bonds, providing a benchmark price for the bond and also a price range.
"We're producing the actual odd-lot price, and we are producing something unique, an odd-lot price range," Frank Ciccotto, senior vice president at S&P Capital IQ, said in an interview. "For any particular municipal security we will produce a representative range indicative of where we think transactions should occur."
The service debuted May 7 and evaluates approximately 1.5 million municipal bond CUSIPs and about 60,000 corporate bond CUSIPs, Ciccotto said.
Odd-lots are bond trades of less than $1 million, and currently account for close to 90% of all fixed income trades, according to S&P Capital IQ's press release.
"The problem we are trying to solve is when investors go to the market place, and there is little transparency for a particular bond," he said. "We are trying to provide more transparency."
S&P Capital IQ is not the only organization that is pushing for odd-lot trades to be more transparent. Lebenthal & Co. launched its own odd-lot trading platform MuniAxis on Dec. 12, because the firm wasn't satisfied with the disclosure available.
"There has been a complete lack of transparency in odd-lot municipal trading, in spite of changing market conditions," Charles Moore, chief executive officer at MuniAxis, said in an interview. "Over the past few years, we have seen a decline in bond insurance and ratings credibility erosion, making it harder for investors to determine fair value for a bond."
MuniAxis differs from Odd-Lot Valuations because it is a trading platform, not a valuation service, and focuses on municipal bonds rather than both municipal and corporate bonds. It is also distinct because tackles the obstacle of odd-lot trades' transparency by using an open-auction method to price bonds.
When a buyer goes to bid on a bond, he gets immediate feedback that tells him if he is the high bidder. If he is not, the buyer can then choose to increase his bid, and if he becomes the highest bidder his bid will show as green on his screen. If the buyer is outbid it becomes red. The buyer can then bid again, if he chooses to do so.
"The whole idea is to use transparency so the bidder, aka the buyer, knows where they stand when submit a bid," Moore said. "If you've been outbid, you always find out in real time and can bid again."
The platform has now signed 80 firms, 30 more than when it had when first launched.
"We add new firms each week," Moore said. "Our initial focus was large institutional asset managers and dealers. We are now reaching out to a broader set of investment managers, broker dealers, and now larger fund managers that trade bigger lots."
MuniAxis has done over 2,700 trades to date for a total par value of $150 million, Moore said. This averages to a trade size of 50 bonds at $50,000 per trade.
"With existing trading platforms, there is no price transparency, bids get submitted 'blind,' bidders don't know where they stand and their capital is tied up...making the process time-consuming and inefficient all around," he said.
Moore said that MuniAxis is the only platform that reports about these trade changes in real time.
Ciccotto said the prices Odd-lot Valuation has and the ranges it's developed can be integrated within the TradeWeb Platform as tools to provide better transparency.
"Tradeweb is a trading platform, and will take this and integrate this tool in a trading system to help wealth advisors and traders make different decisions and manage compliance risk internally," he said.
He does not think MuniAxis or Tradeweb will be in competition.
"MuniAxis and Oddlot valuations are two district and very different services trying to solve very different problems," he said. "I think MuniAxis' value proposition is more the transparent method to trade securities. I view them more as an electronic platform to trade securities. We're trying to provide more transparency into the decision making process or value process."
In addition to Odd-lot Valuations and MuniAxis, Bloomberg provides tools for odd-lot municipal bond pricing and trading. Bloomberg MBWD enables institutional investors to manager their own bidding process by giving them the tools to conduct bid lists directly with their known and disclosed counterparties. Bloomberg also provides the evaluated pricing service BVAL for municipal bonds.
"BVAL provides a price, not a price range," a spokeswoman at Bloomberg said.
Moore said Bloomberg MBWD's bid-system is like the "blind" bid-system he described earlier.
"The easiest way to think of [Bloomberg MBWD] is like a bulletin board, when a firm wants to solicit bids for their bonds they post them on Bloomberg MBWD," he said. "The only firms who can see them, and actually put in a bid on those bonds are dealers who have been approved by the seller."
Moore said that if he is the seller, only those broker dealers he has approved as a trading partner can bid the bonds. No other firms can see them or bid on them.
"If you decided to put in a bid on one of the items I had posted on Bloomberg MBWD you'd submit your bid without the knowledge of any other bids or where you stand," he said. "You might be submitting a bid that's lower than a bid I've already received, there's no way for you to know that. The reason I mentioned that is the same is true for all other municipal trading platforms that I know of. We are the only one that provides a bidder with real time feedback."
Odd-lot Valuations is available for both institutional and retail investors. MuniAxis is not available for retail investors.
