A surge in the use of alternative trading systems in the municipal bond market through the first half of 2022 punctuated the growing prevalence of such platforms among dealers and other market participants in recent years, according to data published in a recent MSRB report.
The number of customer transactions completed through ATSs jumped from 161,436 in 2015 to upward of 500,000 in 2021. In the first half of this year alone, more than 442,000 customer transactions were executed on an ATS.
“…ATSs have continued to increase their importance in the municipal bond market by significantly increasing their transactions with institutional customers, including municipal bond separately managed accounts (SMAs), which are portfolios managed on behalf of investors by professional asset management firms,” according to the report’s authors, John Bagley and Marcel Vieira.
“In fact, ATS transactions with institutional customers have grown dramatically, especially in the first half of 2022,” the report said. “Transactions with institutional customers have become a significant part of the overall municipal bond trading volume for ATSs.”
The growing popularity of ATSs coincides with the rise in popularity of electronic trading in the muni market, particularly for smaller trades. Electronic trading venues like ATSs allow muni market participants to post and request quotes and execute trades directly on those listings, providing an efficient alternative that streamlines access to liquidity.
ATS customer trade totals spiked against the backdrop of record-breaking first-half trade volume totals. May 2022 witnessed the highest number of trades reported to the MSRB in a month, with each month in the second quarter recording over one million trades, according to the board’s mid-year update.
Customer transactions made over ATSs still accounted for a significant portion of all customer trades through June 2022 at 12.4%. The share of trades executed over ATSs out of all customer transactions increased from 2.9% in 2015 to 10.7% in 2021.
Increases in par amount traded during this time frame have not mirrored the pace of customer trades, rising from 1% in 2015 to 2.3% through June 2022, primarily due to most ATS trading occurring with trades less than $100,000.
Bagley and Vieria’s findings are based on transaction and relative descriptive data covering about 2.9 million ATS trades collected through the MSRB’s Real-Time Transaction Reporting System between 2017 through June 2022.
The report defined an ATS as “an electronic trading system that is not regulated as an exchange but is instead a venue for matching the buy and sell orders of its participants.”
The report also found that 55% of all inter-dealer trades made through June 2022 were executed with an ATS.
The percentage of inter-dealer trades made on ATSs inched over 55% after dipping below the threshold in 2021, a nadir in the report’s dataset, which peaked at 59% in 2017. The amount of deals made through ATSs during those four years in between stayed steady. Par amount traded on ATSs in the entire dataset has hovered consistently around 30% of the total inter-dealer par amount traded.
All told, ATSs have factored into over half of all inter-dealer trades since 2016, when the MSRB started collecting such information.
In a Bond Buyer/Arizent Research survey last year, 94% of market participants said electronic trading and AI will play a more prominent role in the muni market in the next five years and beyond.