Netflix, with its vast library and uncanny recommendation algorithms, serves as a fitting analogy for the ongoing transformation of the municipal bond market. The platform’s ability to connect viewers with content they might not otherwise discover mirrors the emerging capabilities of Alternative Trading Systems (ATS) in the bond market. These systems, leveraging real-time streaming and algorithmic analysis, are revolutionizing how municipal bonds are traded, particularly in the realm of separately managed accounts (SMAs). The shift from traditional mutual funds to SMAs, driven by investor preferences and market dynamics, has fueled the rapid adoption of ATS platforms, creating a more dynamic and accessible marketplace. This transformation, driven by technology and shifting investor behavior, is reshaping the municipal bond landscape, offering greater efficiency, transparency, and liquidity.
The flow of money within the municipal bond market reveals a significant trend: a move away from mutual funds and towards separately managed accounts. Data from the Federal Reserve and industry trackers indicate a substantial decline in mutual fund assets alongside a dramatic increase in SMA assets. This shift has profound implications for trading patterns. Mutual funds, typically investing in long-term maturities, trade in large blocks, while SMAs, focusing on shorter-term bonds, trade in smaller, odd-lot sizes. This change is reflected in data from the Municipal Securities Rulemaking Board (MSRB), which shows a dramatic increase in the volume and value of odd-lot trades. The influx of assets into SMAs has created a surge in demand for odd-lot trading, driving the need for more efficient and automated trading solutions.
This increased trading activity, particularly in odd lots, presents operational challenges for SMA managers. Managing thousands of accounts with diverse mandates requires sophisticated technology for valuations, allocations, compliance, and especially trading. The complexity of trading bonds in odd lots necessitates connecting to electronic trading platforms, whether through traditional brokers or independent third parties. These platforms provide essential tools for navigating the market, executing trades efficiently, and optimizing portfolio performance. The reliance on technology has become indispensable for SMA managers seeking to effectively handle the growing volume and complexity of their trading operations.
Enter the Alternative Trading System (ATS), a digital platform that streams bond offerings in real time, much like Netflix streams movies. ATS platforms allow money managers and broker-dealers to screen, list, bid, counter, and execute trades seamlessly using AI-driven protocols. These platforms also analyze market data to generate updated trading protocols and even offer bond recommendations based on trading patterns and preferences. The adoption of ATS platforms has accelerated the electronification of the municipal bond market, bringing it closer to the technological sophistication of the corporate bond market. While various ATS platforms are hesitant to disclose precise trading volumes, they unanimously acknowledge a substantial increase, particularly in odd lots, reflecting the broader market trends.
The benefits of ATS platforms are numerous, ranging from automation and distribution to speed and anonymity. However, the overarching advantage is increased liquidity. This means better pricing and tighter spreads, particularly beneficial for individual investors and professionals operating in the historically inefficient odd-lot market. The MSRB, recognizing the growing importance of ATS platforms, has been tracking their trading data and reporting on their increasing market share. Given the significant volume of bonds traded on these platforms, the term “Alternative” might soon be replaced by “Automated,” reflecting their central role in the evolving bond market.
Beyond the established ATS platforms, other players are entering the market to address the specific needs of different segments. Investortools, recognizing the inefficiencies of multiple ATS connections, has launched its Dealer Network, a platform of platforms that simplifies access for brokers, money managers, and ATS platforms. This aggregated approach provides a single point of access to a wide range of bonds and trading opportunities. For smaller, independent registered investment advisors, platforms like BondNAV offer a cost-effective way to access the market and build customized portfolios. These platforms cater to the specific needs of advisors with lower trading volumes, providing access to a broader range of bonds than traditional brokerage listings. New entrants like OpenYield are further expanding the ecosystem, aiming to create a more accessible and connected marketplace for all participants. This growing diversity of platforms reflects the ongoing evolution of the municipal bond market, driven by technological innovation and the evolving needs of investors.
The surging activity in the secondary bond market is fueled by a robust primary market, which is experiencing a significant upswing in new bond issuance. 2024 is projected to be a record year, potentially exceeding $500 billion in new issues. While the primary market has lagged behind in technological adoption, new platforms like Munichain are emerging to address this gap. Munichain offers deal management and analytics tools, streamlining communication and record-keeping for all parties involved in a bond issuance. The platform’s ability to capture and analyze data throughout the issuance process opens up opportunities for AI-driven efficiency and automation. While Munichain is currently the sole player in this space, the substantial volume of new issuance is likely to attract other entrants, further driving innovation in the primary market.
The combined effect of these technological advancements and market trends is the creation of a 24-hour municipal bond marketplace. As ATS platforms continue to grow and consolidate, they are gradually resembling a quasi-exchange, offering continuous access to trading opportunities. This ongoing evolution, driven by technology, investor behavior, and regulatory oversight, is transforming the municipal bond market, making it more efficient, transparent, accessible, and liquid. This dynamic environment promises to attract new investors and further fuel growth and innovation in the municipal bond market.
