DALLAS -- The online auction site Zions Direct - intent on becoming the "eBay of fixed-income securities" -- is looking for a chance to price its first primary market municipal bond, according to chairman David Hemingway.
Since 2006, Zions Direct has auctioned more than $3.6 billion in more than 14,000 fixed-income auctions, including municipal bonds acquired through its parent firm, Zions Bank in Salt Lake City.
After starting with certificates of deposit, the site added corporate and municipal bonds in 2010. On a given day, munis make up about a third of the auctions, Hemingway said.
"What we haven't ever done at this point is a new issue municipal bond," Hemingway said. "There are secondaries, but no new issues."
Zions has actively pitched the idea of pricing a primary issue on the Zions Direct live auction site, but so far, no issuers have been willing to try it out.
"We have some potential clients where we would combine an institutional deal with a retail order period and we would do the retail order period on the auction platform," Hemingway said.
One city in Utah was considering letting the retail market set the price of its bonds at Zions Direct in June, but in the end decided to go with the traditional competitive pricing system that serves the broker-dealers, said Alan Westenskow, vice president at Zions Bank.
"They had to get it done," said Westenskow, who serves as financial advisor to a number of issuers. "The technology was ready to go. But we're doing something that's brand new."
Zions Direct allows retail investors to bid on bonds in real time, just as brokers and underwriters do on systems such as Ipreo's Parity auction site.
"We are the only broker-dealer that runs an auction of fixed-income securities where we allow individuals to bid on the same issues as institutions," Hemingway said.
"What I see is people managing their own money, buying their own securities, and ten-to-one it's relatively short maturities," he said.
"They're not out buying 20-year and 30-year bonds," he said.
"So, my suggestion to the municipality is: Why don't we auction off the first five years, six years or seven years, and why don't we sell the longer bonds in a traditional institutional underwriting," he said. "They could have their own citizens buy the shorter-term bonds and sell the longer-term bonds to institutions."
Hemingway believes that his system can bring lower interest rates to creditworthy issuers that do not need negotiated deals.
"It's very open, it's very transparent," he said. "If someone's willing to buy the bonds at a lower yield or a higher price than you bid, you get knocked out."
Among those who have used the Zions Direct system is Peter Kuhn, an investor from San Jose, Calif., who owns several million dollars of municipal bonds. Kuhn told a Securities and Exchange Commission hearing in 2010 that he used the Zions system to avoid dealer mark-ups, especially on smaller issues.
"It's hard to get a broker engaged in secondary market trades because I don't think there's a lot of money in it for them," Kuhn said at the time.
Zions Direct charges a flat fee of $9.95 per trade with no markups on the more than 30,000 offerings in its Bond Store, according to its website.
In addition to the auctions, the site provides educational information and videos on Zions Direct TV explaining how the market works. Hemingway also appears in numerous videos on YouTube promoting the service and explaining how bonds are priced.
"I don't know how you can have anything more transparent," Hemingway said.
"This has been highly vetted by FINRA, by the SEC, by all those we've had to get clearance through," he said.
The platform Zions Direct uses was developed by Grant Street Auctions and adapted by Zions.
"The technology's to the point where it can't get any better," said Eric Pehrson, vice president for technology at Zions Direct. "I think Zions has always been ahead on the electronic trading."
Online rivals such as E-Trade, Scottrade, Fidelity and Schwab tend to specialize in stocks and sales of bonds that include markups.
"You might see something that looks like an auction but it's really just someone taking orders electronically," said Jonathan Feinauer, senior vice president for technology at Zions.
The former owner of the domain MunicipalBonds.com launched an affiliated venture, MuniGo.com, that linked to Zions Direct.
Bhu Srinivasan, an online entrepreneur who owned MunicipalBonds.com for four years, sold the site to Canada's Mitre Media in November 2012. MuniGo.com is no longer active.
"I think Zions direct is the pioneer of low-cost bond transactions," Srinivasan said in a phone interview. "David Hemingway is a genius. What they've done from a cost perspective I think is going to be very hard to compete with."
Srinivasan said Zions Direct serves as an appealing feature that attracts customers for Zions Bank.
"Their business is to pool assets," he said. "Their business is not to make money on the trade. It's really just a brilliant strategy."
Zions Bancorporation, the holding company for Zions Bank and its subsidiaries across most of the western United States, reported that deposits grew by $170 million in the first quarter of the year to $46.5 billion.
The fact that Zions Direct survived the turmoil of the Great Recession, the mortgage crisis, the TARP bailouts, the collapse of the muni bond insurers, and myriad other issues in finance over the past eight years could earn investors' trust in its track record, Hemingway said.
"After having done this 14,000 times, we've probably made every mistake we could make," he said. "The good news is we're still here to talk about it."
Hemingway said Zions Direct is steadily gaining recognition for its expertise and educational service.
"If we're not there already, we're becoming the eBay of fixed income securities," Hemingway said. "We have 20 to 25 auctions a day. We need to get to 100 a day. We'll get there. Just give us a few more years."
