Municipal bonds still lag behind corporates in electronic trading, two years after a prod from the Municipal Securities Rulemaking Board to take advantage of the technology to meet best price, execution, transparency, and liquidity goals. However, muni pros said the movement is still new and could gain in momentum soon.
“You have a lot of people in this industry who have gotten used to doing things the same way for decades now and it’s hard to get some of them to change their mind about how they do business,” said Robert Novembre, chief executive officer and president of Clarity Bidrate Alternative Trading System, a division of Arbor Research & Trading LLC which won its first municipal deal last year. That’s “the challenge that we face each day, and we do our best to fulfill our mission one step at a time,” he said.
When the MSRB was preparing the municipal bond market in late 2015 for a new order-handling standard, it urged dealers to determine whether these systems might provide benefits to their customer order flow, particularly retail order flow, and help ensure they are meeting their obligations under Rule G-18(a) with respect to ascertaining the best market for their customer transactions. Similarly, MSRB said dealers need to periodically analyze and determine whether incorporating pricing information available from these systems should be a part of their best-execution policies and procedures.
A Securities Industry and Financial Markets Association report in Feb. 2016 surveyed 19 different trading platforms, including some charging a fee for every trade and others using a traditional subscription based fee. Seven of the platforms included a protocol for municipal bonds. SIFMA said it was a survey, so it doesn't necessarily present a complete picture, and that it hasn't updated the information.
Novembre said Clarity Bidrate has been years in the making. Its vision of expanding and centralizing the market, bringing more transparency, and using competitive pricing to rejuvenate variable rate municipal issues, saw a breakthrough when it won its first new bond deal – a sale of $32.3 million of variable rate bonds by the State of Ohio.
“For us, things are starting to form and the needle is finally moving,” Novembre said. “It has been a long, arduous process and not for the faint of heart but our persistence and perseverance is propelling us. We are definitely moving into the next stage of our process which is building this a new market. [Alternative Trading Systems] in general need investors to get liquidity, but we at Clarity also need issuers to come aboard. It was a blessing to have Ohio on the system.”
Novembre said e-trading systems are designed to level the playing field, “something that forward thinking market participants are embracing.”
Buyside users of electronic trading platforms expect usage of the technology to increase as the $3.8 trillion municipal market continues to seek more efficient methods for managing clients’ investment needs and meeting MRSB rules on disclosure, transparency, and compliance.
Last month, 280 CapMarkets began alpha testing on a new cloud-based municipal bond trading and pricing platform, which is expected to launch in the fall and is geared toward advisors. It provides access to thousands of bond offerings, with full transparency and price discovery, and will help them manage their clients’ portfolios.
It expands the landscape for electronic trading platforms, which investors say are user-friendly, have unique features that help streamline trading, increase efficiency, support best execution, and provide quick inventory turnover, while also creating a large arena for retail and institutional trading.
A New York trader at a large Wall Street underwriting and investment firm uses electronic trading platforms like MarketAxess, which started an expanded platform to include the municipal market last year. He prefers the ability to post inventory and get quick execution due to the wide market visibility.
“We are selling bonds for customers and using electronic trading platforms to get bonds in front of a much wider audience, and retail is seeing bonds they wouldn’t otherwise see,” he said. “Instead of 10 [New York City general obligation] bonds, they may see 100.”
The trader said electronic platforms provide him with a live, fluid dialogue with dozens of potential buyers and sellers all at once, while conforming with best execution practices. He estimated he logs an average of 75 to 100 sell side tickets for odd-lot trades to retail customers daily via electronic trading platforms alone.
“The amount of eyeballs that see your offerings is enormous,” said the trader. “It’s very easy to hit a button and execute a trade on a maturity.”
The firm has thousands of line items posted on electronic trading platforms, he said, and has sold billions of bonds from its inventory in recent years.
Electronic trading platforms are useful and efficient because of the transaction speed and breadth of liquidity, according to Hardy Manges, head of municipal dealer sales at New York-based MarketAxess. The platform’s expansion met clients’ need for more liquidity, price discovery, and efficiency in the tax-exempt market, according to the firm, which operates an electronic trading platform for fixed-income securities, and is the provider of market data and post-trade services for the global fixed-income markets.
MarketAxess said its muni platform has done over $3 billion in total trade volume since its launch, including over 26,000 trades. It also saw about $935 million in trade volume during the second quarter of this year, up 160% from the fourth quarter of 2016. The company said that open trading/MKTX represents 52% of overall volume and that the average overall cost savings is 49 cents a trade. The cost savings metric is for market list trades only. Cost savings is defined as the difference between the executed price versus the best price delivery from a disclosed dealer.
Besides speed, electronic trading platforms help streamline the trading process for dealers and the buyside community in a market that can be illiquid, inefficient and sometimes confusing because of overabundance of CUSIPs, tranches, maturities, and odd-lots, Manges said.
Using electronic trading platforms, “we mimic voice and trading platform protocols to make it easier for customers to buy and sell bonds,” Manges said in an interview in July. “Physically, it means instead of paging through lists of inventory, or scrolling through messages and staring at the same screens day in and day out, the electronic trading platform can alert you to things you care about, like bid-wanted lists, and mimic the same protocols, but make it easier.”
It also facilitates increased liquidity from both the dealer and buy-side communities, which Manges said can be priceless for traders and asset managers.
“Not to have to spot a trade against a benchmark is paramount – it saves 70% of a trader’s time,” Manges said. Dealers or traders can track a list of taxable municipal bonds or Build America Bonds, for instance, benchmarked against Treasuries and sell 10 different tranches to 10 different people, versus spending hours spotting just one trade, according to Manges.
Meanwhile, the electronic platforms also improve visibility – increasing the number of respondents on a trade – while also allowing users to follow best execution practices mandated by new MSRB transparency rules and other disclosure and compliance regulations.
The ability to get a bond in front of the entire market place, with disclosure counter-party or no disclosure counter-party, Manges said, is one of the biggest advantages for dealers and the buy-side community.
While some agree that sales and trading effort benefits from electronic platforms, some say some clients prefer a traditional salesman/client relationship with a personal touch.
Electronic trading platforms do provide an added source of liquidity and efficiency for both the dealers and the buy-side community, according to a New Jersey municipal trader and salesman.
He personally uses MuniCenter, Tradeweb, and MarketAxess for his institutional clients’ municipal bond needs as a means of keeping up with technology designed to aid the sales and trading process.
“I think it gives you another source of price discovery,” he said.
In addition, he said there are times when it allows him to find multiple sources of liquidity – be it another dealer or a customer that he might not necessarily be working with on a trade.
“It’s another tool that can be utilized,” besides scouring the secondary market on a Bloomberg terminal, the trader said.
Some asset managers still rely on Bloomberg terminals for a portion of their trading needs, while others gather price discovery by using comparable trades found in the secondary market rather than third party electronic trading platforms.
“We collect our intel and put that into our pricing models,” one Southwest trader said of the traditional approach he utilizes.
With a fair amount of the financial industry going electronic, the New York trader expects an increase in electronic trading platforms in the years ahead.
“The municipal business won’t go fully electronic, because there are so many CUSIPS, and the institutions want to speak to a sales person, but to have something like this to enhance liquidity helps out,” he said. “I think it’s going to get bigger and provide even better liquidity.”