Fragmentation makes the muni market complex and impossible to standardize. With over 50,000 issuers and more than one million CUSIPs, the amount of data that exists is overwhelming, but analysts say technology helps participants manage, evaluate and navigate the market.
Fragmentation results from the plethora of each bond issuing authorities having a unique issuing process, various usages and differing structures.
"[Technology] can impact every component of the market," said Brownstone head of algorithmic trading Josh Rosenblum. "If you look at the full life cycle of a bond or even a trade, you can see technology already at play."
"Technology is now being used to aggregate offerings and liquidity across the board," Rosenblum said.
Several areas where technology seems to be advancing the muni market the most are data aggregation, pricing and trade execution.
Data Aggregation
Artificial intelligence has been one of the leading technological developments in data aggregation and research for the muni market, analysts said.
Companies like IMTC, AllianceBernstein and BNP Paribas have all
AI's ability to process mass amounts of documentation allows firms to, at times, automate their research processes, evaluate more data faster and create a more efficient data analysis process.
"There are millions of municipals, issuers are idiosyncratic and deals are idiosyncratic — there's just so many moving parts," BondIT head of North America sales Andrew Merrill said. "That's why we founded the company, to try and automate and allow personalization at scale … in seconds instead of taking hours."
AI serves as a funnel, allowing analysts, portfolio managers and other muni professionals to interact with specific subsets of data particularly relevant to them without having to manually navigate the entire muni universe.
"Buyside counterparties, including [separately managed account] firms, mutual funds, and asset managers, can now aggregate liquidity from all of their broker-dealer contacts, banks, electronic platforms, and any other source of liquidity, using technology that wasn't available 10 years ago. It makes it incredibly efficient to scan the entire market," Brownstone's Rosenblum said.
Pricing
Pricing is another area where technology helps combat fragmentation.
Given the number of issuers and securities in the muni market, data can be scarce, dated or not standardized. Technology has created reliable pricing data.
ICE Data's Municipal AAA Yield Curve provides accurate near-real-time pricing data for muni bonds.
"Once we started using those pricing curves, it took a lot of pressure off the evaluators to try to go into their assigned categories, sort [them] based on various criteria and then try to apply the same market movement across those bonds," said Patrick Smith, ICE Data senior director and head of municipal evaluations. "Now they have these pricing curves that are doing it for them automatically throughout the day, and it leads to more consistent pricing."
Instead of relying on artificial intelligence, ICE employs a team of data scientists and evaluators who develop and train statistical and machine-learning models to accurately evaluate bonds. The service aids in fragmentation because it provides a reliable benchmark for pricing and consistently updates.
When OpenYield Founder and CEO Jonathan Birnbaum started developing his company, many market participants did not believe that an automated pricing curve was possible. Experts told him there were too many CUSIPs and too much information, but Birnbaum found "not only can you automate pricing for this market, but algorithms are really well served" in markets that have so much data, he said.
The advancement of pricing system technology created an opening for the integration of electronic trading.
"As suppliers of these pricing systems get greater adoption, there's more electronic trading," Birnbaum said. "It fuels more data and increases confidence."
Trade Execution
Some professionals said the area where technology has the biggest influence on market fragmentation is trade execution.
For many years, there was a "technology gap" between the ability to make investment decisions and execute them, Brownstone's Rosenblum said.
"They might know exactly what they wanted to buy, but doing so efficiently across such a fragmented ecosystem of electronic venues, banks, broker-dealers, and liquidity providers made execution very difficult," he said.
"Technology is already helping to narrow this gap, particularly in the secondary market, where dealer algorithms, client order and execution management systems (EMS) and direct electronic connections between the buyside and sellside have become far more common," said Chris Johnson, head of municipal product at Tradeweb. "These tools have increased trade volumes, improved execution efficiency and accelerated how quickly dealers can turn over inventory."
Technology allows firms to scan all their accounts, buy hundreds or even thousands of smaller positions at once, preallocate those positions across various SMA accounts and find a way to execute and get cash invested as quickly as possible, Rosenblum said.
"Historically, there would be a large backlog of cash that needed to be put to work, but there were only so many traders or PMs that could do it at once," he said. "There was a real drag on getting that cash invested. Now, with technology, they can get invested much quicker, scanning and allocating available offerings much more efficiently."
EMS are the main development transforming execution capabilities, observers said.
"EMS tends to be the first line of defense for folks dealing with fragmented markets," Coalition Greenwich head of market structure and technology research Kevin McPartland said.
Rosenblum explained a lot of his clients are looking into EMS to improve execution.
Some companies are utilizing AI in a similar way to EMS. BondIT incorporates AI into the portfolio optimization process. They create workflows that allow control of the universe of bonds the portfolio will consider and create a personalized portfolio with actionable trades.
"In workflow management, we create a set of objectives that touch everything at the portfolio level and constraints that go all the way down to the CUSIP level," BondIT's Merrill said. The goal is "to give the client a portfolio they can execute."
The market's fragmented nature is being addressed and further development is being explored.
"Given increasing platform fragmentation, infrastructure specialists are in an ideal position to offer protocol normalization, speed to market, operating leverage and other technology efficiencies to an ever-increasing number of firms looking to capture the upside of muni electronification," Bo-yun Liu, TransFICC director of Product Solutions, wrote in an article. "As electronic volumes continue to increase, participants are looking to access more venues, while also automating large parts of the multiple different trading workflows, as they look to reduce costs."
The muni market will continue to adopt new technologies. Modernization makes the market more efficient and accessible and these aspects are critical to ensure continued growth, analysts said.
"It often takes patience for the market to organically change, but it will change," McPartland said. "I think the world's investors ultimately will demand that it does change, just to make it more efficient and more accessible over time."
