Despite rising trading activity in the US municipal bond market, electronic trading remains a small component of the market, up just 0.6 percentage points year-on-year (YoY) to 18.4% of trading in Q3, according to a recent Coalition Greenwich report.
The presence of ETFs in the muni market is creeping back up, with the ETF-to-cash ratio now sitting at 8.32%. While not reaching 2022’s 10.11% peak, this is the second-highest ratio recorded by Coalition Greenwich.
“Many market participants credit ETFs with putting afterburners on e-trading growth in the corporate bond market, and the formula is starting to play out in munis. That said, the “CUSIP problem” and buy-and-hold nature of thousands of muni issues will likely ensure e-trading in munis doesn’t catch up with investment-grade corporate bonds,” authors Kevin McPartland and Neha Jain said.
Regardless, the report adds, the ETF ecosystem will help to increase liquidity, market participation and electronic trading levels.
Activity is already increasing, with overall average daily notional volumes up 18% YoY in Q3, reaching US$15.3 billion. The average daily trade count rose in tandem to 72,691, up 30% YoY, while average daily trade sizes were slightly depressed, down 9% YoY to US$211,718.
Issuance was up 6% YoY.
Also a minor presence, portfolio trading has much potential in munis, Coalition Greenwich predicts. However, the market’s retail-heavy nature and the proliferation of separately-managed accounts are currently a challenge.
“While executing a portfolio trade for a single separately managed account is theoretically possible, the trades are generally too small to be effective,” the report said. “But where there is complexity, there is a solution. PT is coming to munis, and liquidity providers and investors need to be ready.”
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