From the Bond Buyer - Pittsburgh, PA (December 6, 1999)
by Jennifer Karchmer
For the first time, institutional buyers and sellers of municipal bonds will meet next week over the Internet in secondary market trading through a Website powered by the Pittsburgh-based online bond bidding service MuniAuction.
Participants will log onto the Website for the maiden event Dec. 15. The company has limited the number of sellers to seven for this particular auction. As of Friday, 40 potential buyers had registered to trade up to 30 securities totaling $50 million, according to MuniAuction president Myles Harrington.
Zions First National Bank will act as clearing agent for the half-hour auction. Bond sellers will pay Zions a service fee, which has yet to be determined, Harrington said.
Participants, both traditional broker-dealers and institutional investors, will remain anonymous throughout the auction and afterward when the results will be posted on the Website.
"The purpose of this is to confirm that there is a demand for this kind of a product," Harrington said.
Next week's auction will act as a warm-up for MuniAuction's twice-daily trading, which it plans to conduct by the end of first-quarter 2000 with a volume of up to $250 million a day, he said.
The logistics of the Dec. 15 event resemble MuniAuction's Nov. 9 sale, in which Pittsburgh sold $56 million in bonds directly to portfolio managers and broker dealers. In the secondary market auction, sellers putting bonds out for bid will contact MuniAuction the morning of the auction to list an inventory.
MuniAuction recommends that sellers put up plain-vanilla general obligation bonds and recognizable names, although the only restriction placed on the sale is that bond blocks must be larger than $1 million.
Following investor feedback from the recent Pittsburgh sale, MuniAuction is considering instituting a rule which extends the auction by two minutes if the last best bid is received during the final two minutes of the sale. Typically, the majority of bids are received in the last few minutes of an auction, Harrington explained. The rule would give participants the time to react to a winning bid that arrives just before the auction close.
Market players view the upcoming exchange as an alternative to the Standard & Poor's Blue List, a daily record of dealer offerings, and to Bloomberg LP's Pick system, a site where subscribers post bid-wanteds. Other electronic systems, such as Bondtrac, are sprouting up all over the Internet as venues for sellers to list bond inventories online. Unlike these systems, though, MuniAuction will actually execute trades.
"It's an opportunity to add liquidity to the market," said Doug Revello, a product manager with MuniAuction.
Some say electronic secondary market trading is a natural progression for the tax-exempt world.
"We firmly believe the Internet and electronic means of distribution is where technology is taking us, and that it's important to be involved and up on the curve on any efforts in that direction," said Vanguard Group senior portfolio manager Reid Smith, who participated in last month's Pittsburgh sale over the Internet.
Other investors are still wary of online trading.
Thomas Doe, president of the research firm Municipal Market Advisors in Boston, said technological innovation threatens jobs, whether it occurs in the bond market or in other industries. But electronic trading in the secondary market makes sense, he said, especially following the recent Pittsburgh sale.
John Mousseau, director of municipal bond management at Lord, Abbett & Co., said the service that brokers provide would be compromised as buyers are given the opportunity to bypass middlemen through online trading.
"In terms of having assistance through a dealer, he would be bidding and checking the curve and checking other similar credits and where [the bonds] are trading," Mousseau said. "Is that worth a commission? I frankly think it is." Mousseau said he had not been approached to participate in next week's auction.
Interdealers Chapdelaine & Co., J.F. Hartfield & Co., and Municipal Partners Inc. declined to comment on the upcoming trading event. J.J. Kenny Drake Inc. did not return calls.
Skeptics say electronic municipal bond trading may have difficulty getting off the ground.
Tommy Hannon, vice president and chief operating officer of Bondtrac, said its longevity is in the hands of the sell-side being willing "to put their offerings out there in a real-time fashion."
Mike Olander, municipal applications manager for Bloomberg, agreed, adding that the technology is in place, but buyers are looking for a green light.
"The muni market is poised to do online trading, but a lot of it is how quickly the people in the community accept the technology," he said. "It is there to move forward."