Real technological change in the municipal bond market will be uncomfortable for the “merchants of complexity” that benefit from the current market structure.
That’s the word from participants at MuniTech, a conference billed as a magnet for the “tech-forward” in public finance.
“We all have to have a really hard discussion,” said Hector Negroni, a panelist at Thursday’s event in Chicago.
The Model Club
“To make new issue more efficient and more applicable, we have to kill a couple thousand [jobs for] people who are financial advisors, disclosure counsel, tax counsel, all of whom are deeply invested in having no change,” said Negroni, founder and CEO of Foundation Credit.
“It’s actually not really the issuers, it’s all their advisors,” he added.
“If we had been tasked by the federal government to come up with a means by which to raise capital for essential services and infrastructure, the last thing we’d walk out with is what we have,” Negroni said. “It’s super inefficient.”
Moderator Barnet Sherman, a Boston University finance professor, agreed, calling such advisors “entrenched incumbents” and “merchants of complexity.”
The conference was organized by muni fintech firms Munichain and Spline Data.
Manju Boraiah, senior portfolio manager and head of systematic edge fixed income and custom SMA investment at Allspring Global, said that coming from the hedge fund space, he was floored by the comparative inefficiency of the muni market. Today, he suggested, automation has a role to play in market liquidity.
“From our perspective, especially when the rates are so high, investors are really critical about the cash drag,” he said.
“If we want to get from 60 days down to three days, we need trading volume, we need liquidity, we need price transparency,” said Justin Land, CEO of AG Analytics, an Assured Guaranty subsidiary. “Look at the equity market: it’s highly efficient, there’s price transparency, you can trade as much or as little as you want very cheaply. We need all of our market participants to think like that. And it ends up being better for the end client — they’re invested in three days instead of two months. That is where technology will help us … But it needs to be a market thing, it can’t just be one person leading the way.”
Other topics of discussion included separately managed accounts and exchange traded funds, the decline of mutual funds, fragmentation in the muni market, the value of challenging orthodoxy and implicit bias by investors.
“We automate away as much as we can,” Boraiah said. “I think that’s where the innovation is going to happen: client onboarding, client servicing, trading – those are still highly costly. So those functions have to be made more efficient and cost-efficient.”
Artificial intelligence, big data and large language models also came up. Land said advances driven by those technologies can enable greater transparency, and more information means potentially lower borrowing costs.
Issuers are also seeing the impact of new technology. Megan Kilgore, city auditor for Columbus, Ohio, said a “digital revolution” is currently remaking the public sector.
“As this innovation is happening, new technology is not just reshaping how governments perform our operations, but how every single part of issuance workflows occur,” said Kilgore, speaking on a primary markets panel.
Donna Alberico
“Technological investment is ultimately about infrastructure,” said Jennie Huang Bennett, associate vice president of finance at the University of Chicago and former chief financial officer for the city of Chicago. “One of the critical motivating factors for many municipals… is budget cuts and how is it that you are able to continue to operate at a highly efficient level, but without the infrastructure to do that?”
The University of Chicago, she said, has offloaded a lot of payroll processing to bots to create efficiencies and free up staff for higher-level tasks.
Kilgore said in Columbus, the city has started using AI technology in disclosure — for example, to pull together comparisons quickly with respect to things like climate, and to contrast how different local governments disclose.
Bethany Pugh, managing director at PFM Advisors, said there are both quantitative and qualitative advantages to having more data available to build a credit story for the market.
“In the context of pricing data, the quicker and more rapidly we have access to primary market pricing data from transactions across the country,” the better, she said. “What’s going to be interesting is that some of that data from the CD and paper days, we’re going to have to distill all that information because it’s still relevant to our clients … How do we extract and effectively digitize the old information while continuing to develop new information so that it is more surgical and readable?”
Matthew Gerstenfeld, co-founder of Munichain, stressed the importance of collaboration. “If you only have a subset of the market that’s adapting to technology, it tends to slow down progress overall,” he said, while echoing the sentiments of the first panel.
“Firms or individuals who dismiss the [technological] advancements available become dismissed,” he said.