Retail Trading Desks Find the Network Effect in Muniland
Remember when the municipal bond market used to be the quiet corner of institutional finance where the biggest news was that the cumulative default rate actually decreased from 0.10% to 0.08% in 2019? What a difference a year makes.
In the past year, municipal bonds have been on a rollercoaster ride that seems to be showing no sign of ending anytime soon. In terms of overall bond issuance, 2020 volumes currently stand at $440.83 billion, which is more than $14 billion higher than the totals for full-year 2019. In terms of trading activity, volumes shot through the roof in March and April as investors hunted for yield. Those volumes stayed elevated throughout most of the summer and then plummeted as we headed into early fall. They have since begun to climb again, but the whirlwind – which was most pronounced in odd-lots and smaller transactions – has put the spotlight on the municipal market as a hotbed of electronic trading activity.
To help clients better understand these ongoing trends within the municipal bond market, Tradeweb has been chronicling the electronic evolution through its Modernizing Muniland webinar series. In our third installment in the series The Network Effect in Muniland: Connecting Broker Dealers, Buy-Side Participants and Retail Investors, Chris Fielding, Director at Tradeweb Direct sat down with Chad Wildman, Head of Municipal Quant Strategies at Morgan Stanley; and Paul Heaney, Senior Director, Municipal Bond Trading at Ameriprise Financial, to discuss the key trends they’ve been seeing over the course of this volatile year.
A Year of Extremes
Ameriprise’s Heaney summed up the year succinctly, saying: “It’s been a year of extremes.” He went on to explain that, despite, “the many challenges that we’ve had to deal with and that we will likely need to deal with going forward, thankfully we found out that retail is still there when crisis selling occurs.”
Wildman echoed that view, explaining that retail continues to be one of the top counterparties in aggregate for the municipal desk at Morgan Stanley, “We’ve seen an interesting shift over the years, due to regulatory and behavioral changes, into external retail and SMA style institutional counterparties… March was a challenging time for everyone, but the ticket flow with those counterparties has continued to stay at elevated levels.”
Trading technology, of course, has played a major role in facilitating those volumes as volatility increased and trading desks were forced to navigate the COVID-19 crisis while working remotely.
Wildman explained that workflow enhancements played a major role in their firms’ ability to move this volume. “The technology side of the equation has been less about algorithmic price generation and execution, and more about focusing the people on where there is the most to gain – identifying the spots where the value-add from an expert looking at a situation is going to have the most impact,” Wildman said.
A common trend amongst traders in the muni world has been to look for processes to easily automate while still embracing experts to do their jobs with enhanced workflows and better tools.
The Rise of RFQ
One of the more divisive issues in the muni industry has been the growth of dealer-to-dealer request for quote (RFQ) electronic trading, which is a marked departure from the old fashioned, relationship-drive and phone-based method of muni trading. Tradeweb’s Fielding pointed out that even among Tradeweb clients who use RFQ trading, there is sometimes debate over how it should best be used.
Heaney added that the reason Tradeweb’s RFQ capability has been so helpful to his firm is that it allows them to position themselves for unique situations and opportunities that exist within their system – meaning, they can pick-and-choose their spots to supplement a particular strategy, rather than trying to be all things to all players.
Heaney said “Our advisors right now buy about 30-40% of their munis from our inventory’s principal trading. The majority of Tradeweb offerings are where they are going to find their bonds. We impose some bond characteristic filters, but we allow virtually all counterparties to show bonds through Tradeweb. So that’s what’s hitting our advisor desk.”
Looking forward, all participants agreed that many of the changes that have taken place over the past year are likely to continue to be a part of the municipal marketplace long after the COVID-19 crisis is behind us.
Whether it’s increased adoption of electronic RFQs, deeper penetration into ETFs and other asset classes or continued innovation of existing workflows, the municipal bond market has moved forward in leaps and bounds this year, with no sign of that growth stopping any time soon.
To hear the full conversation, please click here.