Alternative trading system platforms provide the value of visible liquidity and price discovery in the marketplace, especially for municipal securities that are not widely known and transacted when directly compared to broker's broker platforms, according to a new MSRB report.
The Municipal Securities Rulemaking Board
The main focus of the new report was looking at it from a segment perspective, focusing on what kind of bonds trade on these two systems and why.
“For ATS and broker’s brokers, who we consider to be very sophisticated market participants? We looked at why some types of bonds trade on ATS or broker’s brokers platforms. What are the characteristics of those bonds?” said Simon Wu, the MSRB's chief economist and author of the report. “The main takeaway is that ATS offers a platform that is easier, even for dealers, to search for price. You can see for certain bonds, they can really find value and better price discovery on ATS platforms.”
This indirectly provides more liquidity and price transparency because a lot of customers trade with dealers at large.
The MSRB used data collected from the MSRB’s Real-Time Transaction Reporting System, which populates an indicator for ATS trades, and from the dealer registration database, which indicates whether a trade reporting dealer is a registered broker’s broker with the MSRB.
Trades on ATS platforms are smaller, more likely to involve securities with complex features, such as insured bonds, bonds with call features, bonds subject to the alternative minimum tax or bonds traded at a discount that exhibit negative convexity due to the de minimis tax effect, the report said.
Broker’s broker platforms tend to attract larger-sized trades and are not necessarily a preferred trading venue for bonds with various complex features.
The report found that of inter-dealer trades executed via an ATS platform and/or a broker’s broker platform, 56.4% of all inter-dealer trades and 26% of inter-dealer par value traded were executed on an ATS platform during the period of August 2016 through April 2021. In addition, 5.3% of trades and 16.1% of par amount were traded on a broker’s broker platform.
The average trade size for inter-dealer trades on ATS platforms was about $60,000 par compared to $396,000 for trades on broker’s broker platforms and $218,000 par value for all dealer-to-customer trades.
The number of trades on average were 5,084 on ATS platforms and 663 on broker’s broker platforms.
“While these numbers may seem to be low when considering there are nearly one million municipal securities outstanding, it compares favorably to the average of 4,141 bonds traded daily between dealers via a non-ATS or non-broker’s broker venue, as well as to the average of 13,525 bonds traded daily between all market participants via all venues," the report said. “Essentially, most municipal securities are rarely traded, and on a given trading day, less than 1.4% of all outstanding municipal securities are traded.”
ATS platforms generally offer better search functionality than some broker’s broker platforms, which may especially benefit smaller trades and/or trades in more obscure municipal securities, the report said.
“It is possible that, on aggregate, broker’s broker platforms are tailored toward trading dealer’s principal positions or on behalf of institutional investors as opposed to trading on behalf of individual investors,” the report noted. “In addition, some broker’s broker platforms may not provide a sufficient amount of visible live quotes to subscribers when compared to fully electronic ATS platforms that specialize in both RFQs and live quotes with auto-execution functionality.”
Taxable munis, which represent a smaller segment of all securities and are not considered to be complex in terms of their structures, are “nevertheless more likely to trade on both ATS and broker’s broker platforms than direct dealer-to-dealer venues,” according to the report.
“It’s another way to look at how new technologies, electronic trading platforms in particular, affect the market,” Wu said.
