Published

August 2022

Author

Structural shifts are creating opportunity for electronic efficiencies, as asset managers flock to platforms that offer unique liquidity pools, data, and technology.

Electronic trading of municipal bonds is at a tipping point. While corporate and U.S. Treasury bonds have seen improved price discovery, transparency and liquidity via the use of electronic trading platforms, the $4 trillion U.S. muni market lags when it comes to digitization.

Yet several factors are driving fresh momentum. Structural shifts like remote work, the popularity of Separately Managed Accounts, and record growth in municipal bond ETFs are generating demand for digital trading efficiencies.

The stats are compelling: 67% of buy-side municipal bond traders execute at least some of their trades electronically, according to Coalition Greenwich, with 11% of municipal bond volume executed electronically in May 2022. As an operator of market leading Alternative Trading Systems (ATS) for the trading of fixed income products, ICE Bonds has seen institutional growth across its liquidity pools.

Since the pandemic, the growth of remote work has underscored the need for new ways of working, where a lack of in-person collaboration makes it harder to get trade information, collaborate and execute. Here, electronic trading makes it possible to gather information on liquidity and data quickly and efficiently. This dynamic has fed a broader shift to using digitization to execute smaller trades, so that traders can focus on larger deals which need more human intervention. As a result, greater value has been placed on functions like straight-through processing, which cuts time needed to manually book trades after execution.

In addition, the robust growth of Separately Managed Accounts (SMAs) has meant a far higher volume of trades is required to manage client accounts. SMAs are favored by many investors as they allow direct ownership of muni securities versus a share of assets in a fund. As the increase in assets have grown substantially, the number of orders is simply too large to handle via the phone hence the shift to electronic trading to meet these needs. In addition, the presence of muni pricing algos has led to more electronic trading, as these providers of liquidity offer reliable and speedy venues to source or offload risk positions.

In turn, SMA growth has spurred the ongoing uptake of trading protocols like Click to Trade and RFQ, which offer live and executable quotes for spread and price-based requests. The growth of municipal bond ETFs has supported digitization in a similar fashion. Muni ETFs saw record inflows last year, as investors sought low-cost tax-exempt yields, with an analyst suggesting these vehicles could see their holdings jump another 40% in 2022.

Technology lends a competitive edge

In the fragmented muni market - where most bonds originate from small issuers and financial data can be scarce and dated - electronic trading can provide access to a wider range of liquidity pools and counterparties. ICE Bonds has acquired key muni assets via its acquisitions of BondPoint and TMC Bonds (TMC), creating the market-leading venue for ATS Muni trading. Across ICE Bonds, over 450 unique liquidity providers have traded more than 367,000 distinct securities with fill rates consistently over 99% during the last two years. Amid market volatility and rising interest rates, ICE Bonds has observed increased adoption of digital muni trading, with Institutional adoption up 250% year over year.

To help with price discovery, especially for less liquid bonds, ICE Bonds clients can access Continuous Evaluated Pricing (CEPTM)*. Continuously updated market data can help give municipal bond traders an edge: ICE Bonds provides data on bids, offers, CUSIP quantity, price, yield and settlement date, which can be co-mingled with the data already used by asset managers and institutions. ICE’s AAA muni curve is also available on the TMC ATS and updates every 5-10 minutes based on actual trades rather than indications from dealers. Content and analytics from ICE Data Services includes access to ICE Liquidity IndicatorsTM and Best Execution.

As fixed income markets are shaken by volatility, a growing swathe of municipal bond traders have come to appreciate the value of electronic liquidity and refined pricing models. And as a focus on efficiency grows, the momentum behind digitization looks set to gain pace.

* Fixed income evaluations, continuous evaluated pricing, end-of-day evaluations, evaluated curves, model-based curves, market sentiment scores, and Fair Value Information Services related to securities are provided in the US through ICE Data Pricing & Reference Data, LLC and internationally through ICE Data Services entities in Europe and Asia Pacific.

Trading and execution services are offered through ICE Bonds Securities Corporation or ICE Bonds member FINRA, MSRB, NFA and SIPC. The information found herein, has been prepared solely for informational purposes and should not be considered investment advice, is neither an offer to sell nor a solicitation of an offer to buy any financial product(s), is intended for institutional investors only and is not intended for retail customer use.

Trading analytics available from ICE Data Pricing & Reference Data are a point in time output and as such dependent on and take into account the information available to ICE Data Pricing & Reference Data at the time of calculation. ICE Data Pricing & Reference Data does not have access to all relevant trade-related data or dealer quotes, and the utility of the output may diminish depending upon amount of available data underlying the analysis. The inputs utilized in each of the trading analytics services described herein depend on the methodologies employed by each such service and may not be the same as the inputs used in the other trading analytics services. There are many methodologies (including computer-based analytical modelling) available to calculate and determine information such as trading analytics described herein. ICE Data Pricing & Reference Data’s trading analytics may not generate results that correlate to actual outcomes, and/or actual behavior of the market, such as with regard to the purchase and sale of instruments. There may be errors or defects in ICE Data Pricing & Reference Data’s software, databases, or methodologies that may cause resultant data to be inappropriate for use for certain purposes or use cases, and/or within certain applications. Certain historical data may be subject to periodic updates over time due to recalibration processes, including, without limitation enhancement of ICE Data Pricing & Reference Data’s models and increased coverage of instruments. Although ICE Data Pricing & Reference Data may elect to update the data it uses from time to time, it has no obligation to do so.

Fixed income evaluations, continuous evaluated pricing, end-of-day evaluations, evaluated curves, model-based curves, market sentiment scores, and Fair Value Information Services related to securities are provided in the US through ICE Data Pricing & Reference Data, LLC and internationally through ICE Data Services entities in Europe and Asia Pacific. ICE Data Pricing & Reference Data, LLC is a registered investment adviser with the US Securities and Exchange Commission. Additional information about ICE Data Pricing & Reference Data, LLC is available on the SEC’s website at www.adviserinfo.sec.gov. A copy of ICE Data Pricing & Reference Data, LLC’s Form ADV is available upon request.