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Cognizant 20-20 Insights
Municipal Bonds: Consolidating and Integrating Bids to Improve Transparency and Discovery
An integrated, consolidated “bids wanted” platform can make all market bids available, regardless of a bid’s source. This can significantly increase pre-trade price transparency, strengthen a firm’s capabilities, inject new funds into the business and drive profitable growth.
Municipal securities are relatively illiquid, and pre-trade price transparency is not a given. In contrast to other asset classes traded in the secondary markets, quotation information is not prevalent, and to the extent that it does exist, is not widely disseminated. Although alternative trading systems (ATSs) organizations have made offerings easier to obtain by making bids more available, they are not as transparent and centralized when compared to the coverage and breadth of municipal markets. This paper focuses on the significance of integrating “bids wanted” sources to improve pre-trade price discovery; the benefits of an integrated platform that consolidates different vendors; and the resulting value to brokerage/asset and wealth management firms. We will highlight the capabilities of such a platform, the challenges of implementation, and discuss how technology can help institutions achieve a transformation that otherwise can be complex to attain.
The Case for Consolidation
For many firms managing the municipal securities business, the trading process can be very cumbersome, since traders must log into separate “bids wanted” applications to track the market and decide where investments should be directed. This takes up valuable time, and can impact a trader’s ability to make productive decisions. Furthermore, traders may need to bid on the same CUSIP1 from different sources – resulting in more keystrokes and less productivity. A unique feature of the municipal bond market is its dispersion. There are several issuers, millions of individual CUSIPs and mostly small issues. The creation of an integrated, consolidated bidswanted platform can make all market bids (retail, institutional and street) available, irrespective of where the bid is sourced. Consolidation implies that all market inventories will be accessible to traders wanting to evaluate options for arbitrage, understand the breadth and depth of the market, and consider the liquidation options that the
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market holds at any point in time. This capability can significantly increase a firm’s client offerings – potentially injecting net new money into the company, fueling growth and enhancing the institution’s trading capabilities in municipal bonds. Pre-trade Pricing Information There are over a million different municipal bonds outstanding at any given time, totaling approximately US$3.7 trillion in principal. The average daily trading volume in 2011 was US$11.3 billion, with US$3.3 trillion by par amount traded the entire year. However, despite the size of the municipal securities market, municipal securities are relatively illiquid. About 99% of outstanding municipal securities do not trade on any given day. Trading is most active in newly issued bonds, and declines significantly as time passes; only 15% of municipal securities trade in the second month after issuance, for example.2 “Bids wanted” are displayed electronically through Bloomberg, proprietary online trading platforms, proprietary Web sites, electronic-mail dissemination applications, fax dissemination applications and vendors, for instance. Institutional investors looking to sell municipal securities generally rely on multiple avenues to obtain pre-trade price information in the form of bids. Their access to large networks of broker-dealers and tools for obtaining bids from more than one dealer allows them to contact potential buyers and independently assess the bids they receive for their securities. Alternative trading systems (ATSs) are generally available to participating municipal bond dealers and to institutional investors. Established and reputable brokers maintain a complete trading history on all items – bid-wanted items, the bid history of all firms that bid for the item, the levels at which they bid, and the history of all firms that passed on bidding for the item. Currently, institutions with large municipal securities portfolios access pre-trade information through several sources, such as BondDesk, Tradeweb, MuniCenter and Bloomberg.3 Brokerage institutions, as well as asset and wealth management firms, require solutions that integrate and consolidate their various bid-wanted systems. This helps them provide optimum value to their retail and high-net-worth clients, as well as to prominent institutional players in the markets where they operate.
No single bid-wanted source accounts for more than 50% of the bids-wanted “universe” – making the unification of multiple sources highly desirable.
Features of an Integrated Bids-Wanted Platform
Bids Management An integrated bids-wanted platform should allow all bids to be ranked, and have the capability to sort, slice and dice on variAn integrated ous metrics – not only from current sources, but also bids-wanted from new sources that may platform should be added over time. This allow all bids to be can enable the development of an automated bidding ranked, and have application that allows the capability to municipal bond traders to sort, slice and execute multiple transacdice on various tions simultaneously. Aggregation Capability
The platform should aggregate all “bid wanted” by par at the time the user views the aggregated bids dashboard. This will indicate the depth of the market. The aggregated bids may be sub-categorized as Retail, Institutional and Street. The platform will aggregate all outstanding bids wanted to give the trader an idea of what possible exposure to the market would look like in real time. Dashboard Data – Display Capability The system should allow aggregated bids to be grouped by state; source; maturity; ratings; tax exempt/taxable; security type (general obligation versus revenue bonds); security class and sub-class (utility, transportation, etc.). A global search capability should permit filtering by bid source, bid time, states, maturity, par, taxable and rating, for example. Trader Customization and Configuration
metrics – not only from current sources, but also from new sources that may be added over time.
Through the configuration function, traders can turn vendors on or off as required (for example, if they do not want to consider or bid on certain vendors at a certain time). The configuration will be based on the trading levels applicable for the desk and the region. Access to each level should be controlled via user setup permissions.
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Traders can also use this screen to set defaults, take certain actions to affect all ”bids wanted” in their area, and estimate their exposure. Some of the characteristics that traders can specify include:
should display all matching bids and offerings to the trader, as well as the historical bids and the MSRB history. The system should also provide for compliance alerts.
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Default grouping. Default columns sorting. Re-offer price. from desk/Send all “bids wanted” to partner. View partners’ “bids wanted.” “Bids wanted” count by type. Developing a Flexible Architecture Achieving the above and utilizing a best-of-breed bids-wanted platform requires a flexible, technically sound and robust architecture that is scal- A bids-wanted able and high-performing. The platform’s connectiv- platform must offer ity services must enable a state-of-thecommunication with other art, customized bid-wanted sources, as well as with the internal com- user interface munications server and with integrated Web services. Business features that allow services must provide for routing rules, trader-based traders to bid workflow and other inte- simultaneously on grated services through the same CUSIP the business rules server. Data services should retain through multiple the bids-wanted data, and sources, identify enable users to look up all duplicate bids, and bids and offer histories in real time. This is not easy, provide alerts for given that the bid and offer cut-off times, for histories for a given CUSIP example. produce large volumes of data – from several hundred to thousands of records that can span three to five years of historical bid and offer prices. Technology Integration Bids-wanted applications from different sources can have fundamentally different technology stacks and design principles. No single application can provide all the capabilities needed to enable universal integration with other bids-wanted source systems – a task that necessitates reengineering/greenfield design (designing from scratch) to create a platform that integrates and consolidates other sources while maintaining and enhancing existing capabilities to enable a higher level of integration. Data Unification and Front-end Capability Consolidation can be a significant challenge – not only because of the immense volumes of data that must be culled from various sources, but also due to the IT skills needed to develop a front
• Away • •
• Bid live count/par/market value and execution
count/par/market value. Intelligent Processing and Fair Pricing The platform can be designed to evolve into an integrated part of a future order management system that checks all external and internal sources for matching bid-wanted offerings, and trades in the marketplace before a trader bids. It will check current MSRB prices for matching CUSIPS to help ascertain fair and reasonable price levels before a bid is reflected to a customer. It will scan all available offerings in the same state to assess possible demand.
The bids-wanted platform should allow users to compare a potential bid versus the market, view bid histories, relate any indicative or material event associated with a particular bid wanted, and evaluate possible re-offerings.
Better Decision Making The bids-wanted platform should allow users to compare a potential bid versus the market, view bid histories, relate any indicative or material event associated with a particular bid wanted, and evaluate possible re-offerings. The system should check – at a trader’s request – other available offerings in inventory that might compete with a particular product.
The platform’s capabilities should be applicable to retail, institutional and street-side bids, and have the ability to highlight duplicate bids and their sources. It
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end, or interface, that allows traders to have a real-time window into the entire bids-wanted landscape – with the benefits of speed and performance. This is critically important, given that traders look up a lot of information, including bids and offerings history, in order to analyze a given CUSIP before bidding on it. Consequently, a bids-wanted platform must offer a state-of-theart, customized user interface with integrated features that allow traders to bid simultaneously on the same CUSIP through multiple sources, identify duplicate bids, and provide alerts for cut-off times, for example.
integrated. From a cost perspective, we advise firms to start with an experienced bids-wanted service provider with offerings that can be integrated in-house with like applications to achieve the scope and performance needed, and provide the range of features mentioned above.
Limited pre-trade price transparency is a significant challenge for individual investors and the brokers/dealers who manage client and proprietary muni portfolios. It can inhibit competition among market participants who seek to provide the best prices. Also, it is more expensive for investors to trade municipal securities than to trade corporate bonds or equity securities, since transaction costs are higher due to low price transparency. There are opportunities for market trading platforms to make use of sophisticated technology to increase their access to inventory, and for price providers to improve the dissemination of information on all available inventories and prices. While challenges that have to do with the structure of the market may not immediately allow dealer entities to efficiently aggregate and disseminate trading information, the technology platform that they use can be reengineered to aggregate bids-wanted data and disseminate post-trade data. This helps assure fair pricing and the best execution for the client, based on the most accurate pre- and posttrade municipal security information. In the long run, the benefits of an integrated platform outweigh the efforts and investments it requires, and can help firms build a stronger muni capability, increase profitability and drive growth.
Currently, there is no single platform that can provide more than 50% of all “bids wanted.” However, there are a few vendor systems that come with extensive muni-product bid-wanted features. These can be a good buy, and can be baselined for further integration.
Build or Buy?
Large financial institutions with substantial municipal bond inventory need to evaluate the build versus buy option. Currently, there is no single platform that can provide more than 50% of all “bids wanted.” However, there are a few vendor systems that come with extensive muni-product bid-wanted features. These can be a good buy, and can be base-lined for further integration.
Nonetheless, incurring the cost of a bids-wanted platform is a significant investment proposition that can have an ROI spread up to 10 years. The cost may need to be distributed over a one- to three-year system implementation phase, based on the extent of integration and the number of bids-wanted sources to be
CUSIP (Committee on Uniform Securities Identification Procedures) refers to a 9-digit alphanumeric code assigned to all security issues approved for trading in the United States and Canada. “Bringing Municipal Bond Trading Into the Light.” Speech by Commissioner Elisse B. Walter, U.S. Securities and Exchange Commission. October, 2012. http:/www.sec.gov/news/speech/2012/spch100112ebw.htm.
Comprehensive Fixed Income Trading Technologies. http://www.bonddeskgroup.com/main/products/ats/bonddesk-direct.
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1. Tradeweb Platform. http://www.tradeweb.com/Retail/Functionality/. 2. Fixed Income Marketplace. https://www2.themunicenter.com/. 3. Municipal Securities – Overview of the market structure, pricing and regulation. http://www.gao.gov/assets/590/587714.pdf. 4. Municipal Securities Rule Making Board – Factbook. http://msrb.org/msrb1/pdfs/MSRB-FactBook-2012_WEB.pdf. 5. Electronic Municipal Market Access – Municipal disclosures and market data. http://emma.msrb.org/.
About the Author
Sameer Hiray is a Consulting Manager in Cognizant’s Business Consulting Group with more than 12 years of consulting experience in the areas of business management, financial services and capital markets. He has worked with leading global firms in the banking industry in domains such as investment banking, investment management, risk management, private banking, and asset and wealth management. In his current role, he is engaged in delivering business solutions, including business IT transformation, business process consulting, operating model definition, business IT assessment and implementation strategy. He can be reached at Sameer.Hiray@cognizant.com.
The author would like to thank Cognizant Business Consulting, Capital Markets Practice lead Ed Elgerzawy (Ed.Elgerzawy@cognizant.com) for reviewing the paper and providing valuable feedback.
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the world’s leading companies build stronger businesses. Headquartered in Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry and business process expertise, and a global, collaborative workforce that embodies the future of work. With over 50 delivery centers worldwide and approximately 166,400 employees as of September 30, 2013, Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow us on Twitter: Cognizant.
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