BOSTON (06/05/2000) - The MuniCenter, backed by Wall Street giants Merrill Lynch & Co., Morgan Stanley Dean Witter & Co. and Citigroup Inc.'s Salomon Smith Barney unit, opened its doors Wednesday, becoming the first online exchange for municipal bonds to go live, beating out a slew of competitors.
"The (online) bond market is becoming a very big deal," said David Ader, vice president of global fixed income at Thomson Financial Services, a unit of Toronto-based Thomson Corp. That's because there's a lack of information in the physical bond market that tends to lead to higher "spreads" - the difference between a bid and sell price - than with stock trades and other types of investments, said Ader.
Online bond trading hubs should provide brokers with more information at the point of execution, which should eventually lead to narrower spreads, said Ader. He estimated that there are 30 to 40 electronic bond trading hubs that have or are about to launch.
Here's how the new exchange will work: Brokers will be able to significantly reduce the time they currently spend on the telephone - and increase their reach to other brokers they trade with - by using TheMuniCenter to automate the way they trade bonds via browser-based software.
This is different from the way a stock exchange operates because bonds are more difficult to describe and sell.
There are currently over 77,000 different issuers of municipal bonds alone - these are bonds issued by local government authorities such as city and state governments used to pay for public projects such as stadiums and highway construction.
In addition, any small-town government can produce more than one bond issue - for different projects with different payout periods. After the initial sale, bond holders who wants to sell a bond again enter a secondary market, where brokers step in.
Normally, it takes a great deal of work for broker/dealers to find a suitable buyer, according to MuniCenter CEO Thomas Vales.
Vales said that TheMuniCenter will make bond information available to potential investors but all trades will have to be placed with brokers.
This may change in the future, he added. TheMuniCenter has applied to be registered as a broker itself, and approval from the Municipal Securities Rules Making Board is expected in about three months.
The exchange also has plans to expand into other types of bonds - such as new issues - and has plans to affiliate with news services, research firms, credit analysts and providers of bond analytics and other content.
The company plans to generate profits by charging brokers a transaction fee for every bond that is sold, based on the size of the transaction, said Vales.