The Muni Telescope On-Line Investment Services Steer Clear of Municipal Bonds
May 19, 2011
They trade stocks in their underwear, check out economic forecasts as their facial mudpacks dry, scan mutual fund rankings during Seinfeld reruns -- all from their home PCs. But the thousands of retail investors clicking into Internet brokerage services like e.schwab and E\*Trade can't get anywhere near the municipal bond market. They can't buy, can't sell, can't see what's available and can't even get price quotes to see how much the munis they own are worth. Operators of electronic trading services say the muni market, with its thousands of issuers and millions of separate bonds and maturities, is just too complex to stuff into a manageable software program. ``Munis don't have symbols. There's no universal identifier,'' says Tommie Englehart of e.schwab, which along with a Schwab dial-up service, handles 20,000 stock trades a day. ``How do people find what they want without using a universal identifier?'' But as more investors log on and start to actively manage their own investment portfolios, munis as an asset class risk being left behind -- just at a time when slow institutional business has the market relying on the retail dollar. ``Municipal bond dealers need to look at the Web, and look at how discount brokers are using it, and begin planning for how they're going to integrate the technology into their distribution,'' notes Markita Shaffer of First Chicago Capital Markets Inc., which experimented with advertising new issues on the World Wide Web this spring. Yet some of the biggest opposition to on-line muni trading is likely to come from the muni industry itself, which uses the opaqueness of the market to protect its profit spreads. Although the Internet stock services market themselves mostly on the basis of low commissions, munis have traditionally been sold without any explicit commission. Instead, the broker's cut is added into the quoted price. Coming to that quoted price, however, is always a matter of interpretation. Bonds are valued according to the fame and trustworthiness of an issuer, the strength of its credit, the size of the bond's coupons, the addition or quality of bond insurance, the attractiveness of call features and the size of trading blocks. The nebulous pricing process helps conceal the dealer's commission, and many traders worry that opening up the process with published Internet prices would limit their ability to profit from markups. ``We get quite a bit of requests for bond pricing on our Web site, and we would like to be able to provide pricing on demand,'' said Davina Keeley, whose Bonds Online service now makes do with a map of the states showing upcoming muni issues. ``But a lot of traders are nervous about putting prices out in front of retail.'' That said, electronic trading of munis might increase volume for the big firms. Because there's no formal exchange for munis -- and because person-to-person trading would face huge clearance and registration hurdles -- registered firms with deep pockets would have to stand ready to buy bonds offered on the Internet or carry an inventory of bonds available to be sold. Cut out of the transaction, of course, would be sales forces in the field. But many retail sales reps aren't particularly interested in selling munis anyway because the return on them is small compared with stock commissions. Internet information about munis could also help generate business for sales reps, even if the actual transactions take place on the phone or in some other conventional format. ``If the customer can find out what's coming, then we'll have the bonds pulled through the channel rather than pushed through'' with broker suggestions, Mr. Keeley says, adding that part of his business model involves providing customer leads for brokers who advertise on his site. Advertising what's coming, particularly by the underwriters of new muni issues, is still under a legal cloud because of state laws on investment solicitations. But there aren't any regulatory barriers to secondary trading of munis on the Internet, according to Chrystal Teena, executive director of the Municipal Securities Rulemaking Board. ``They just have to price the security fairly if they're going to attach a price to it and offer it,'' Mr. Teena says. Because Internet dealers won't be explicitly recommending any one municipal bond, they won't be required to provide enormous amounts of backup information, Mr. Teena says. But ``the prices you put out there had better be fair.'' Of course, there's still no guarantee that investors are ready to hit any Internet price for munis. Ricki Hayes, manager of the Net Investor on-line trading service, notes that municipal bond buyers tend to be older and more established than equity investors, and perhaps less likely to own computers. He says a ``Bond Inquiry'' page on his site hasn't received much traffic, raising questions about current demand for on-line muni trading. ``The big bondholders aren't on the Internet yet,'' Mr. Hayes says. ``But as you get more and more of that bond purchaser out there, it'll make sense to build something to serve the clientele.''
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