Building a new municipal bond market

October 25, 2012

When FIX – the industry electronic trading standard – was fleshed out for fixed income in 2003, municipal bonds were incorporated. I got a fresh look at FIX at the FIX Protocol Americas Trading Conference this week. All the major muniland alternative trading systems (ATS)  including Bonddesk, MuniCenter and Tradeweb, as well as the major dealers are already FIX compliant for the latest 4.4 version.

The SEC has tasked the Municipal Securities Rulemaking Board (MSRB) with several new pre-trade transparency initiatives. They are considering two projects:

1) Determining the “prevailing market price” for a municipal security.

2) Aggregating bid and offer prices for a municipal security so all market participants can see “depth of book.”

The conundrum in bond markets is that a specific security is not continuously quoted because the security is not available for sale on a consistent basis. Bond markets do not trade like equity markets. But that has not stopped dealers from providing streaming price quotations on some bonds. At the FIX conference, the head of electronic trading for a global dealer said that it provides live streaming quotes for 5,000 to 6,000 corporate bond issues every day, but only about 1,000 of those actually trade. The dealer is still willing to quote the security if a seller emerges. We have vastly more securities in muniland, but dealers don’t have to quote the entire universe of bonds for them. A dealer might only quote California or Texas or New York bonds, for example, and another dealer might be active in only hospital bonds.

The Bond Buyer reported that a group of ATS and interdealer brokers are talking about building a centralized platform for quote aggregation:

Pierce disclosed that some broker’s brokers and firms that operate alternative trading systems or ATS — electronic trading platforms used by dealers — are discussing the idea of creating their own centralized platform for electronic trading of munis by investors. Many industry members believe they can create a more effective centralized system than regulators, she said.

If the dealers want to build another ATS, they should go for it. But that is not what the public needs. What the MSRB needs to build is the muniland equivalent to the New York Stock Exchange’s Consolidated Quotation Plan:

…CQS [Consolidated Quotation System] receive trade and quote information, respectively from NYSE, AMEX, and the other regional market centers using a standard message format. Each system validates its respective message format, verifies the information against its databases (e.g., valid symbol, etc.), consolidates the information with the other market centers’ information, and disseminates the information to the data recipients in its respective common standard message format via the IP Multicast network. Included in every trade and quote message is a timestamp which represents the time that the message is disseminated.

The standard message format for this project has already been created in FIX. Here is how FIX Protocol handles quote contribution for fixed income securities, for example:


The new MSRB Consolidated Tape, like MSRB’s RTRS, would be distributed as a data subscription service to market participants to create new and useful tools for municipal bond transparency. Think of all the new types of market data tools and trading platforms that could be developed around the MSRB Quote Tape. For example the Quote Tape could be mashed up with any muniland index and/or U.S. Treasury data. Muniland could reinvent itself, bring in new market players and fulfil the request of SEC Commissioner Elisse Walter to create a “prevailing market price.”

The best part of this approach was pointed out to by Lisa Taikitsadaporn of Brook Path Partners (who I interviewed about FIX for fixed income in 2003 and who co-wrote the article that the above flowchart comes from) is that it would be porting a globally-used standard across all asset classes into the municipal space. There is already a very large group of vendors who stand ready to support this extension to the FIX Protocol. The credit default and interest rate swaps markets are using FIX for much of the functionality that is moving to exchanges as mandated by Dodd-Frank. These markets are as complicated as muniland.

I’m sure that the MSRB and the SEC don’t want to reinvent the wheel in their efforts to enhance transparency. The easiest path to creating a solid foundation for the municipal market is to adopt FIX and the best practices of other asset classes. The FIX is in.

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