Modernizing Muniland: Technology and the Future of the Muni Market
The municipal bond market has not historically been the first port of call for those seeking the latest in technological innovation. A sprawling $4 trillion asset class, with over a million outstanding securities – two-thirds of which are owned by individual investors – the muni market has been one of the last hold-outs where volume associated with relationship-based, phone trades continues to outstrip that of electronic trades.
What does a more tech-driven municipal bond market look like? How has it been influenced by the COVID-19 crisis, and how will it continue to evolve in the new normal? Bill Buzaid, Head of Buyside Sales at Tradeweb Direct, recently sat down with Tim Morbelli, Head of Municipal Trading at AllianceBernstein, to discuss those issues.
A Market Ripe for Innovation
The rationale traditionally cited for the slow adoption of electronic trading in the municipal bond market has been that it is just too complicated. Tradeweb’s Buzaid explained that with over a million different securities coming from 50,000 issuers and an esoteric mix of structures, munis have always been a relationship-driven business where many believed electronification would never work.
AllianceBernstein’s Morbelli agreed with the historical perspective, but shared his firm’s view that the structural inefficiencies of the muni market are exactly what makes it so ripe for innovation.
“Those are the opportunities,” Morbelli said. “The complexities in the municipal bond market are what create the need for a better mechanism to communicate electronically, to share information, aggregative information and convey important data to counterparties.”
Put to the Test During the COVID Storm
Morbelli and his team have been major advocates of muni market electronification for several years, working with Tradeweb to connect electronically with dealers and building their own proprietary technologies to analyze trends and source liquidity. “This lets us reach out to wealth management firms or other firms that maybe we don’t talk to regularly, or who aren’t in the market regularly,” Morbelli explained of the Tradeweb and proprietary solutions. “Just in pure execution, we’ve saved our clients over a million dollars year-to-date…”
All of this investment in technology served AB well in March when COVID-19 forced all of Wall Street into work-from-home mode and threatened to dry up liquidity completely. “It was a difficult period for all of us. The priorities were to increase communication with our client base to show them what we were seeing in the markets…” Morbelli explained. “Because we had been aggregating and analyzing data at the attribute level for several years, it was easy for us to see which way the market was going and, ultimately, to use that data to spot an opportunity.”
The firm’s early investment in technology helped them navigate the pandemic in ways that would not have previously been possible. Ultimately, Morbelli and his team were able to not only source the liquidity they needed amidst the flight to cash, but were also able to start playing offense, becoming a bid in a marketplace ripe with opportunity created by the unprecedented shock.
The Road Ahead
Not surprisingly, Morbelli has little doubt that the trend toward electronification of the muni market is going to grow considerably from here. He thinks it will be driven by two factors: improved efficiency and regulation.
Efficiency has certainly not been a hallmark of the muni market historically. Buzaid raised the topic of the “odd-lot discount,” a pricing inefficiency that has existed in the muni market for generations whereby smaller lots are universally acknowledged to trade at a substantial discount.
Morbelli recalled that “When I first came over to munis and heard about this concept of an odd-lot discount, I was blown away that it is just an accepted part of business” He elaborated, “We saw it as a huge opportunity for our clients, for us to go out and capture that. That’s pure alpha that we can produce for our clients. That’s why we’ve invested so heavily in our technology because we want to do that on a scale that will be impactful for our clients.”
On the regulatory front, Morbelli commented, “We fully expect regulation to come down the pike that will force electronification.”
As the benefits of aggregated liquidity, trade automation, and portfolio optimization technology continue to become more apparent, it is expected that muni market electronification will only accelerate. Early adopters are realizing efficiencies that have allowed them to unlock alpha for their clients and competitors will be forced to follow that example or risk underperformance.
To hear the full conversation between Buzaid and Morbelli, please click here.