MuniLand

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.

Last week I wrote about the size of the municipal bond market and the kinds of investors who are involved in it. This week I thought it would be helpful to explain how municipal bonds are traded.

Most people understand that stocks are traded on exchanges but bonds aren’t. Although bonds could easily trade on an exchange (the New York Stock Exchange already has a setup to do just that), they currently trade “over-the-counter,” meaning that brokers contact each other and trade bonds between them.

This method of trading between dealers can happen on a phone call or fax, through the messaging system of a Bloomberg terminal or through an aggregator platform. These aggregator platforms are very common for fixed-income trading. The SEC publishes an updated list of trading platforms, which are known as “alternative trading systems” (ATS). The regulatory oversight of ATS is very limited when compared with exchange oversight, and they are not required to publish their rulebooks as exchanges are.