From The Bond Buyer – Pittsburgh, PA (June 4, 1997)
by Richard Richtmyer
Competitive bidding for municipal bonds is coming to the World Wide Web.
Grant Street Advisers, a Pittsburgh-based financial advisory firm, has developed a prototype Website where issuers selling bonds competitively will be able to do so over the Internet.
Called MuniAuction, it’s being billed by its developers as “the first municipal bond auction Website.”
The current site, in development since April 1996, allows issuers, underwriters, and investors to get more information and see a demonstration of how the service will work. MuniAuction – located at http://www.muniauction.com – went live last Wednesday, and the firm expects to have a fully operational site by the end of the summer.
“We do a lot of competitive bid transactions, and our experience with the competitive bid process is that it doesn’t work very well,” said Myles Harrington, president of Grant Street Advisers.
The current method of submitting bids by fax or by messenger is inefficient, and can result in bids being lost due to fax-machine backups or illegible bid submissions, Harrington said.
With the Web-based bidding system, however, underwriters and institutional investors can compete for the issues – either by individual maturity dates, or on an all-or-none basis – in a real-time anonymous bidding environment.
Critics of the Internet’s usefulness as a tool for making real-time business transactions have pointed to the capricious nature of the medium. The chances of servers crashing, or slow transmission of data because of network traffic jams, have caused some to steer clear of the information superhighway.
But Harrington disagreed, saying the Internet is just as reliable as the current vehicle of choice for competitive bidding.
“If somebody wants to say that the Internet is undependable, my argument is that it is at least as dependable as the fax machine,” he said.
MuniAuction is the first site on the Internet where market participants will be able to bid on individual pieces of competitive bond offerings, but it is not the only electronic bidding system that allows this kind of slicing up of deals.
Last summer, 21st Century Municipals, in conjunction with MuniBid Inc., released a two-part software package called Parity and MuniBid, which enables underwriters to bid on individual bond maturities.
That system – which its administrators say was used on 525 competitive bond sales representing $3.3 billion in par value last year – has drawn criticism from some of the major Wall Street broker-dealers. They say letting bidders pick off the choice pieces of a bond deal will leave the issuer with unwanted goods and higher interest rates.
But there are some key differences between MuniAuction and the Parity- MuniBid system
Users of Parity-MuniBid submit their bids blindly, as opposed to the MuniAuction Website, where all of the bids submitted will be displayed on screen as they are received, allowing others to adjust their bids.
Another difference is that Parity-MuniBid is not Internet-based, but rather is run on a private network, where underwriters vying for the deal upload their bids to a private server maintained by 21st Century Municipals. The issuers then dial into that server and pick up the bids.
In addition, documentation such as the notices of sale and preliminary official statements are available and can be viewed by market participants on-line over the MuniAuction site, setting it apart from Parity-MuniBid.
As for the critics on Wall Street, Harrington says: “There’s always going to be some objection to innovation, especially by people who have a franchise.
“If people object to maturity-by-maturity bidding, they can still bid all-or-none. The only distinction is that they’ll have the opportunity to see the best all-or-none bid and try to beat it.”
Ultimately, it will be the issuers who will determine whether or not this kind of auction system will become successful, Harrington said.
“This product is going to be driven by the issuers, not by the broker- dealers out of New York,” he said. “And the issuers have reached a point where basically they want to take charge. This is something that empowers them to take control of the sale of their own bonds.”