WASHINGTON — A Chicago-based broker dealer has launched an electronic platform executives say will help ensure new-issue municipal bonds reach retail investors efficiently and at fair prices.
Incapital, a firm that has traditionally specialized in making fixed-income products directly available to retail investors, updated in October a muni bond version of Incapnet, an online system that executives say can distribute new-issue munis directly to some 600 retail-focused brokers and financial advisors nationwide.
Those firms include large, national companies, as well as smaller, regional dealers and firms that operate online electronic brokerages, like Charles Schwab & Co. and Fidelity Brokerage Services LLC, said Incapital executives.
The system launches as the Municipal Securities Rulemaking Board continues to shore up regulations of retail-order periods in an effort to ensure retail investors receive fair prices.
“The majority of retail investors are buying municipals in the secondary market at higher prices,” said Bill Carney, vice president of Incapital’s municipal finance group. He said the system can make the new-issue process more efficient by providing issuers direct access to retail financial advisors.
“This will prove to be a very important tool for reaching retail [investors] in the municipal bond market,” said Mike Smale, managing director of Incapital’s muni division. “Based on the proportion of muni bonds that end up in retail hands, the retail new-issue market is undersold.”
Smale and Carney note that retail investors hold the majority of municipal securities, but less than 10% of munis owned by retail investors were purchased by those investors during the retail order period.
According to market data cited by the Securities and Exchange Commission in its July report on the municipal market, roughly 50% of outstanding principal of municipal securities is held by retail investors, and another 25% is held by mutual funds on behalf of individuals.
Incapital, which was launched in 1999 by Chicago Cubs chairman Tom Ricketts, spent months working with market participants to ensure the Incapnet muni module is tailored to the needs of the municipal market, executives said. The company has not yet sold any muni issues on the system, but has distributed more than $275 billion in non-muni new-issue bonds on Incapnet since 1999, said Carney.
He said the company plans to underwrite new negotiated municipal issues, including general obligation bonds and bonds backed by a dedicated revenue source.