LOS ANGELES — EAX Trading, a San Francisco-based company that had plans to launch a municipal bond exchange targeting the secondary market, closed its doors last week.
"We were unable to raise the outside capital," said Clarke Roberts, managing partner and founder.
Roberts made a presentation on the electronic trading platform Oct. 21 at the California Debt and Investment Advisory Commission's pre-conference event before The Bond Buyer's California Public Finance Conference.
"The CDIAC presentation was our last swan song," Roberts said.
Roberts spent two years developing the patent-pending process aimed at improving the secondary trading of municipal bonds.
Prior to EAX, he co-founded Pico Quantitative Trading, an agency broker-dealer focused on high-speed, quantitative trading across asset classes for U.S. equities and futures. He also worked as director of quantitative sales within Merrill Lynch's Portfolio and Automated Trading Group.
He described the EAX platform as one that would reverse the bid-wanted process, so instead of sellers contacting buyers, buyers would enter their interest. The process would also allow bidding based on the bond's characteristics as opposed to the CUSIP number.
"We had a lot of clients interested in what we were doing, but the secondary municipal market didn't prove large enough for traditional venture capital interest," Roberts said.
Though there are estimated to be $10 billion trades every day in the secondary market, roughly 75% are in amounts of $1 million or more. EAX focused on the smaller retail lots, which represents 25% of trades.
A large percentage of the volume is captive volume, he said, which means it was not being traded on the open market. It would just be bought or sold out of a broker's account.
The venture capital firms were concerned that there are not that many market participants from a trading perspective. Ten broker-dealers represent 50% of the municipal market, he said, so there is a high amount of concentration risk.
EAX had a lot of interest from the broker-dealers, but there was concern that if one of the large broker-dealers didn't support it, it could put a significant dent in the trading platform's ability, he said.
"Venture capitalists were intrigued, but they did not feel it was compelling enough to back with capital," Roberts said.
TMC Bonds, the most well-known municipal bond trading platform, expanded into corporate bonds a few years ago. MarketAxess Holdings Inc., the largest corporate bond trading platform, is looking to expand into municipal bonds, according to a recent Wall Street Journal article.
