Infrequent trading, lack of liquidity nag munis

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In 2019, municipal fund flows had the best year on record and continue to break records into 2020. Still, despite the asset class swelling to potentially more than $4 trillion in size and roughly a million bonds outstanding, only 1% of those bonds trade on any given day.

The infrequency of trading these bonds speaks to the pain points facing today’s muni investors who must overcome the challenges of scalability, lack of liquidity and data quality that are currently plaguing the market. Investors often find it difficult to know what the right pricing for a given bond should be, and investment technology has fallen short of addressing these fundamental flaws.

Russell Feldman

IMTC, formerly known as CBXmarket, created the NOVA platform to give the municipal market the infrastructure to help generate alpha and enable humans to do what they do best. NOVA streamlines front-, middle- and back-office functions, including portfolio construction and optimization, risk management, performance evaluation, compliance monitoring and reporting.

To address the challenge of scalability, IMTC is partnering with tech-forward investment managers whose portfolios typically range from $1 billion-$100 billion in fixed income assets under management. Muni portfolio managers managing retail money often struggle with the high number of accounts in their purview; NOVA aims to optimize hundreds of portfolios while accounting for extensive compliance rules. IMTC has more than 80 engineers that have an ongoing partnership with Microsoft Azure, which allows IMTC to offer scalable solutions for mandates that encompass other asset classes.

IMTC is proposing solutions to the market’s liquidity issue. This low rate/tight credit spread environment forces investment managers to continuously hunt for paths toward unlocking after-tax yields. For example, in an internal firm interview, PIMCO’s muni bond portfolio managers say that this has been ongoing source of frustration that’s only gotten worse since the global financial crisis, noting that there’s a “growing mismatch between the available liquidity and investors that might demand that liquidity” since funds with daily liquidity—like open-ended mutual funds—have grown in size during this same period.

The fact that some muni bond investors will hold rather than trade bonds after failing to find an active market for a specific security, obtain a certain price, receive different quotes for the same bond or efficiently compare and contrast data across third-parties led IMTC to consider these specific liquidity risks. Compared to new issues in the corporate bond market, new issues in the municipal bond market are much smaller, and the quantities of bonds available in each maturity can be very limited.

To combat these issues, the IMTC platform sits at the center of an investment manager’s technology stack and lets users distill highly fragmented research, compliance and allocation processes into workflows. It also offers connectivity to other vendors, including execution platforms, broker-dealers, custodians and accounting systems to help to eliminate operational friction and maximize scalability.

Solving the issues of scalability, liquidity and data quality requires a unique and holistic approach. IMTC uses an algorithm that provides liquidity insights, while the platform continuously optimizes portfolios by suggesting managers reallocate funds for comparable securities any time that the system determines there are more attractive trades to execute.

The IMTC Evaluated Price leverages historical market data combined with traditional financial statistical methods and estimations to train a regression model that calculates day-to-day price approximations of the buy- and sell-side. The firm uses similar technologies for bond and company ratings and aim to leverage AI to ensure data quality, which until now, has been a limiting factor within the fixed income environment.

By applying the parallelization capabilities of cloud and cluster computing, the tool can parameterize the entire data pipeline and yield instantaneous research iterations. IMTC also ensures accuracy by back-testing best practices for financial data and comparing prediction errors to those of industry standard price estimates.

Market dynamics continue to shift in the municipal market. Long-standing liquidity troubles in conjunction with structural changes such as the ramp up of passive investing and the increased supply of taxable munis, continue to increase pressure on active muni investors. The need for technology that effectively synthesizes data and helps managers make more informed decisions has never been greater. IMTC aims to facilitate the navigation of this evolving landscape to help managers continuously add value for their clients.

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