E-trad­ing in Mu­nis is Grow­ing

The Bond Buyer - - Front Page - By AARON WEITZMAN & CHRIS­TINE ALBANO

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 buy­side 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,” said a trader 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.” ◽

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