If the city of Pittsburgh can do it, why can’t you? The home of the Steelers has taken the lead in putting out its bonds for sale directly over the Internet, including a planned placement of $55 million last month. The idea is to let competition provide a better rate and to save money on fees. Corporations, too, are beginning to see the potential of the Internet for floating debt, and also putting corporate deposits out to bid.
The city of Pittsburgh has conducted six online auctions worth $708 million with MuniAuction, an Internet-based bidding system, but bids have been limited to brokers, who have the option of buying an entire bond issue or blocks of bonds based on maturity date. However, the city’s online auction in November was open to both brokers and institutional investors.
“I don’t think there’s any question that all the competitive end of this business is going to be done over the Internet,” says Myles Harrington, co-founder and president of Pittsburgh-based MuniAuction, which has completed more than 100 transactions, worth $5 billion, via its site.
The average cost for an institution buying bonds in the traditional distribution channel is $5 per thousand, Harrington says, while the cost through Internet auction is 50 cents per thousand.
The potential of online bond trading has spawned other start-ups, including InterVest Financial Services, of Berwyn, Pa., which has begun to connect corporate issuers with investors, removing the investment bank from the equation. InterVest’s fee, like MuniAuction’s, is a fraction of the standard commission.
There’s even more potential for corporations to leverage competition. MuniAuction has branched off into auctioning bids for state deposits in banks. A recent auction for the deposits of Ohio resulted in the state obtaining yields that were 16 basis points higher than yields obtained through customary methods, Harrington says.