Dealers, meanwhile, are building or acquiring electronic trading capacity. Last year, TD Bank Group bought Headlands Tech Global Markets LLC, which delivers fully automated electronic market-making in municipal bonds. In March 2022, Raymond James bought SumRidge Partners LLC, an electronic bond trading firm.
On the buy-side, AllianceBernstein Holding LP, has invested heavily in technology enabling the firm to compete against dealers for bonds, rather than pay them a markup to buy securities. The firm uses computers to scan tens of thousands of bond offerings each day, determine whether a bond is priced attractively and fits into an individual investor’s account, and then bid on the security.
Electronic trading also allows AllianceBernstein to build individual portfolios faster -- between five and 12 days, instead of a more typical 60 to 90 days -- minimizing the amount of time an investor’s funds are held in cash, said Jim Switzer, the firm’s global head of fixed income trading and head of municipal bonds.
AllianceBernstein’s municipal trading volume has jumped to 17,000 trades a month in 2022, from 17,000 a year in 2019, despite having two fewer human traders.
“We can’t go back to a manual process,” Switzer said.
Meanwhile, the growth of municipal bond exchange-traded funds could also spark more electronic trading, just as it has in the corporate market, according to McPartland.
Large corporate bond ETFs, such as the $33 billion iShares iBoxx Investment Grade Corporate Bond ETF, have drawn arbitrage traders seeking to earn a profit by exploiting the discrepancies between an ETF’s share price and the price of its underlying securities.
Because the arbitrage trade involves buying or selling baskets of the ETF’s underlying bonds, electronic market makers began trading the underlying securities, boosting liquidity, said McPartland.
Average daily muni ETF trading volume grew to $1 billion in the second quarter of 2022, from about $200 million per day in 2021, according to Jane Street Group LLC, a trading firm specializing in ETFs. The iShares National Muni Bond ETF, the biggest muni ETF, has $29 billion in assets.
This article was provided by Bloomberg News.