Muni Dealers Consortium in Cautious Online Venture

The newest entrant to the realm of online bond trading -- and it's a biggie -- is one that individual investors will never see, even if it plays a role in their transactions.

Goldman Sachs (GS Quote), PaineWebber (PWJ Quote) and Bear Stearns (BSC Quote) are set today to announce the formation of MuniGroup.com. The consortium's technology, its founders say, will create a marketplace for the buying and selling of municipal bonds by individual investors, through their brokers -- full-service, discount or online. The creation of a marketplace should lead to more favorable pricing of muni bonds for individuals, MuniGroup.com officials say.

Here's what MuniGroup.com says it intends to do: launch Web-based software that will allow any broker-dealer that chooses to participate to display its inventory with live, executable prices to other participating broker-dealers.

The upshot? In a traditional muni bond transaction by an individual, the individual calls his broker and gives him some parameters. For example, maybe the investor wants a New York investment-grade zero-coupon bond due in 18 years. The broker checks to see if his firm has such a bond in stock. If not, the trading desk goes looking for one, using the phone.

By contrast, if the broker's firm is a participant in MuniGroup.com, the broker can enter the parameters into the system, and be shown matching bonds -- and their prices -- from the inventories of all participating dealers.

Alternatively, an investor using an online broker to buy munis would enter his parameters into the broker's system and be able to see the same list of offerings.

MuniGroup will be compensated on volume, rather than exercising discretion over its profit in individual transactions, as bond dealers do.

Investors will also be able to sell bonds via the system, by posting them for sale and awarding them to the highest bidder.

Finally, MuniGroup.com will give customers of participating brokerage firms access to new muni bond issues underwritten by other participants. Currently, access to new municipal issues is practically limited to the customers of the firms in the underwriting syndicate.

The system will be open to any broker-dealer that wishes to participate, MuniGroup.com CEO Connie Duckworth, formerly of Goldman, said in a recent interview. "We're trying to balance enough contributors with enough distributors," she said.

MuniGroup.com also intends to launch a Web site that will serve as an education center for municipal bond investors. It will not be possible to do transactions via the site.

The other partners in the venture are Spear Leeds & Kellogg, Susquehanna Partners and BondDesk.com, which itself is a partnership involving Goldman, PaineWebber and BondExchange. BondExchange, a Mill Valley, Calif., software company, built a bond transaction platform that is used by E*Trade (EGRP Quote) and Donaldson Lufkin & Jenrette's (DLJ Quote) DLJdirect (DIR Quote).

MuniGroup's indirect competitors in this arena include eBondTrade.com, MuniDirect.com, and a handful of other Web sites that give access to Bond Express, a database of bond offerings from dozens of dealers that is updated daily. (TheStreet.com profiled it last year.)

These other sites have a different objective: to get retail investors to open accounts and to do their bond business through them.

MuniGroup.com's model, by contrast, hews to the notion that maybe most muni bond transactions will continue to originate the old-fashioned way -- with a customer picking up the phone and dialing his broker. Given how little headway has been made so far by anyone who's tried to sell bonds to individuals via the Internet, that's an intriguing bet.

MuniDirect.com Launches Auction Capability

Launched last week, MuniDirect.com offers its customers, who must have accounts with the firm, the ability to auction muni bonds to the highest bidder. If you hold a muni bond in a MuniDirect.com account, you can post it for sale, indicating a reserve price -- the lowest price at which you are willing to sell it.

Bids are due each Wednesday at noon EST. If you receive a bid equal to or over your reserve price, you must sell the bond. If you don't, you will have one hour after the close of the auction to decide whether you want to sell to the highest bidder.

The first auction will conclude today. As of last night, 18 bonds from 12 states were offered for sale.