A marriage of municipals and tech

Transcription:

Lynne Funk:

Hello everyone, and welcome to another Bond buyer podcast. I’m Lynn Funk, executive editor at The Bond Buyer, and I am excited to welcome Steven Winterstein, founder of SP Winterstein and Associates, which he opened in June. His firm advises buy-side and sell-side clients on vetting vendors, looking at synergies between different technologies and advising on their product sets. Winterstein spent 17 years at PNC beginning in 1993 where he started the buy-side muni shop at the firm before moving on to Wilmington Trust, where he spent eight years running strategy. Since leading the buy-side, Winterstein has spent around four years in FinTech working at Market Access and Alpha Ledger before starting his own firm. So welcome Steve.

Stephen Winterstein:

Thanks, Lynn. It’s good to be with you.

Lynne Funk:

It’s great to have you. So I want you to talk about what led to you opening up shop, when, why, how all the things.

Stephen Winterstein:

I decided back in 2019 to move to a technology company and focus on municipals, and that’s when I joined Market Access, heading up municipals there. After about three years of market access, I became very interested in distributed ledger in blockchain and was approached by AlphaLedger firm out in the west coast and spent about a year there working on underwriting and recording data on chain. For me personally, I grew a lot there in terms of my understanding of technology, but it had pretty much run its course for me, and I think they’re going on to do some interesting things. 

But I decided that I had a unique skillset having spent so much time on the buy side and then the last four years in technology that I might be able to offer something to both buy side and dealers. After my stint at Alpha Ledger, I decided to hang up my own shingle and immediately started receiving interest from a number of different data firms, technology firms, dealers, and believe it or not, advocacy groups as well. So that was kind of the nexus between where I am now and where I began my career.

Lynne Funk: So you probably would say then, Steve, when you looked at your muni experience and then your experience with technology, those two worlds, let’s face it, have not traditionally overlapped so well, and maybe I’m putting words in your mouth, but I’m thinking that I’d like you to talk about the evolution of maybe how technology has infiltrated or hasn’t in the muni market.

Stephen Winterstein:

Right. Well, I can remember when I first started in the industry back in the 1980s, salespeople and traders were saying that this thing, Bloomberg, will never work because it’s built on personal relationships. The entire industry is built on personal relationships. And so I grew up in that environment and it’s been a tough road to hoe, as they say, in terms of adoption. I do think that some of it has to do with the demographic, some of it has to do with the complexity of our market and the idiosyncratic nature of our market. But I also think that in recent years that traders, portfolio managers, salespeople, everybody involved in the market, I really think that they have vendor fatigue because I think that there are a lot of firms out there that promise that they can deliver things, and when it comes right down to it, it’s still on the whiteboard and what they aspire to. And so I think that that can disappoint the potential customer, and it certainly has slowed down adoption of technologies that actually are effective. I think there’s another problem that we face in the municipal industry, and that is with vendors that claim to be able to do something innovative and earth shattering.

And it turns out that some of those things are just technologies that we’ve seen in the marketplace, and it’s sort of a redux kind of situation. So for me, sifting through a lot of the noise, identifying technologies that actually do work, things that are innovative and new, and then seeing how they can apply in public finance, in portfolio management, in trading, in sales, buy side, sell side data, and so on and so forth. I think that’s where my sweet spot is.

Lynne Funk:

Do you think that maybe some of the challenges is integration of these potential new technologies or innovations?

Stephen Winterstein:

Yeah, there’s no question. I think that’s a great point, and there’s no question that that is a challenge. One of the problems that we suffer from in the municipal market is that we’re usually the last in line to get resources. And so I think at least when it comes to the larger firms, their attention is directed towards markets where perhaps revenues are much larger because they’re larger markets. The things that spring to mind are investment grade credit, high yield, emerging markets. When we’re talking about fixed income, certainly rates, asset backs, mortgages and so forth. And then when it comes to municipals, we are such a small sliver of the market that we are in line and ultimately we get table scraps when it comes to technological resources. 

I do think that there’s an exception with firms that are focused strictly on municipals, where that is their main asset class, whether it’s regional dealers or whether it’s buy-side firms that are focused on municipal fixed income. They seem to be the ones that are actually more forward thinking, and maybe that’s the wrong term, Lynne. Maybe they’re not forward thinking, maybe it’s just that they, since they are focused on municipals, they have the resources inside the firm to dedicate to that market. And I guess what I was trying to say, or what I’m trying to say is it’s not that firms that don’t implement technology aren’t forward thinking is just that the resources may not be there.

Lynne Funk:

Yeah, that’s a great segue because one of the topics I wanted to get into with you is with news of lower head count, with even firms exiting the business UBS is done in munis, there was a story of Citi potentially exiting the business. Where do you see what role perhaps can technology play in filling voids? Can it, should it, how can it?

Stephen Winterstein:

Well, I can think of a lot of examples where firms have left public finance, come back into it, left again and come back into it. And so the cases that you just cited weren’t too distressing to me, they weren’t too disturbing because I’ve been around long enough to see that happen, and I understand that that can be largely cyclical and that it’s certainly not a death nail for public finance in terms of the large banks. I think there is a fear out there from the firms that are in the business right now and watch this, that the technology is going to help destroy jobs. It’s going to be a threat for their departments and so on.

Maybe it’s just my bias, but I’ve chosen not to look at it that way. I really think that that technology, like anything, any other market, but any other thing in history, technology certainly changes things and jobs are lost there, but productivity increases and maybe it increases in the same space, maybe it increases or it is applied to a new space. And the net result is that we have an improved product set and improved efficiencies. So I think for example, when I first started in the municipal business, I can remember that people still use typewriters and then you could save a memory on a typewriter and then just hit a key and it would print out a whole document. Then when we migrated over to PCs, word processing, I can remember where people would say, well, it’s going to be the death nail of assistance. We won’t need assistance to type up documents anymore.

And my mind goes back to the old secretarial polls of the 1950s where you had a legion of typists producing documents or dictation where the boss would dictate a letter, well, that happen anymore, yet, look at the efficiencies that we have from all of that, and guess what? Assistance aren’t outdated. We still need assistance, we still need that kind of functionality. It’s just that they’ve changed what they do and how they do it, and in many ways, their job has become more effective because they’re not spending time typing up a letter. So I think the same thing, you can take the same principle and you can apply it to the municipal market. Let’s think about data. Let’s think about trading. Let’s think about the advent of the algorithmic firms systematic trading, right? So without mentioning any names, we’ve all seen in the last call it eight years, systematic trading come into our market. It’s been around for quite some time, probably 20 years or so. Certainly it started in the equity markets. It seeped into the taxable fixed income markets, and now here it is in the municipal market. And what we’ve seen is that bid offer spreads and odd lots have started to compress, and that’s good for the market because that means more turnover in the market. That means more liquidity for different corners of the market.

And so it’s changed the trajectory of the way things are traded, and it’s made it more efficient, it’s more productive, and it allows buy-side firms, for example, to put money to work very quickly. It allows dealers to move their inventory much more quickly, and I think everybody’s benefited from it. And I think we’re just in the beginning stages of, for example, algorithmic trading. So yeah, there might be some jobs that it displaces, and I guess I’m a little off the beam here from your original question, but I think it all, we can bring it back full circle where it’s going to change some jobs and it’s going to eliminate some jobs, but I think it’s going to improve markets in other places. Remember Lynn, and you know this better than anyone, public finance, the municipal market builds 75% of the infrastructure that we have here in the United States. It touches everybody’s lives in so many different ways. The need to finance, the need to fund and the need to provide liquidity in that market isn’t going to go away anytime soon. And so the way in which those things are done will change form, they will morph, and I think it’s definitely a good thing.

Thank you, Steve, that I have quite a few follow-up questions there for sure. But we are going to take a short break and when we come back we’ll have more on technology with Steve Winterstein. And we’re back with Steve Winterstein. 

We are talking technology, and I was asking you headcount question, and I think you really did lay it out there in a way that I’ve heard from various other folks in the industry. It’s not necessarily stealing jobs, it’s perhaps making jobs easier to do. So what do you think though, in terms of a lot of firms, when I asked you about integration earlier, what about sort of this build versus buy from what your seat, I’m sure you are advising clients on whether to build their own technologies internally or do they spend the money and invest on the outside and bring somebody else in? What are your thoughts generally? How’s that shaking out?

Stephen Winterstein:

I think that middle market firms and smaller firms tend to be more nimble, and they also tend to be more focused on a few specific areas as opposed to some of the larger firms out there. And there are specialty firms. When I think about broker dealers, I think about the regional firms that are focused on public finance. When I think about buy side, there are the huge complexes and then there are the more nimble middle market firms that provide portfolio management and asset management services. The ones that are focused on municipal probably have more ability to build. They can make that decision. And the monstrosities out there, the huge banks, they probably have the resources, as we said, if it filters down to the municipal divisions, then they have the resources to build things out. I think one of the challenges at the larger firms is that when they marshal technology for trading and sales, the one thing that is a challenge for them is that municipals tend to standalone in terms of their idiosyncrasies.

So they can build something, for example, spread products. So we look at most taxable fixed income markets and they trade on spread to a benchmark, a benchmark yield curve. So if we look at IG credit or we look at em, they trade on a spread to treasuries, for example. So when you build that technology, it tends to be applicable to multi-asset classes. In fixed income, of course, tax exempts don’t trade on spread, and so you’re saddled with a different kind of problem. And so the big banks have to decide, do we build technology that applies to munis or do we go find something that works specifically in the tax exempt market? And the answer, I think, traditionally is that they buy when it comes to munis rather than build because they build in accordance with multi-asset classes. The smaller firms, as we mentioned, tend to be a little more nimble and they tend to want to build versus buy, but in the end, they build certain things where they have competency, but then they will go out and they will buy other technologies that integrate with what they’ve built. So I don’t think it’s a binary decision all at once. I don’t think a firm says we’re going to build everything or we’re going to buy everything. I think it’s a combination in the end.

Lynne Funk:

That’s great. Do you think, let’s talk a little bit about data. One of the things that in this market, there’s lots and lots of data, but I guess the question is how much of it is good data? How much of it is useful, and how do you see the industry harnessing various data, data sets?

Stephen Winterstein:

Sure. Well, I mean, what is the old saw that don’t let perfect be the enemy of good enough or the good, and I think we suffer from that. It’s funny. It depends who you talk to. 

What I’m really trying to say is I’ve looked at the data and from most of the providers out there, my sense is that the data is good quality data. There can be some problems here and there. Those problems tend to be noncritical. I wouldn’t call them trivial, but they’re noncritical. The challenge that we have is a lack of credit analysts to cover the, call it 65,000 issuers that borrow in the public markets. If we’re going to tackle this problem, we have to allow credit analysts to focus on the things that they’re really good at. Do I need a credit analyst to spend two days doing a writeup on a credit that has been AAA for the last 20 years and the data hasn’t changed and they’re likely to remain AAA for the next 20 years? The answer is probably no. So why am I wasting the resource of a skilled, bright and insightful credit analyst on things that don’t really require their attention today? And so I think that there are some firms out there that have tackled this by using credit scoring, for example, and they have triaged the market and they’re allowing their analysts, which they have a limited pool of resources, and they allow their analysts to focus on the things that really matter, whether it’s high yield, whether it’s the lower ratings categories, whether it’s private placements or municipal loans. The analyst can provide so much value in that space.

And a credit score oftentimes at least can take care of doing surveillance on certain sectors and certain ratings categories.

Lynne Funk:

That’s really excellent, that analysis in my view, because one of the questions I wanted to get into next, when you talk about how much, there’s only so much that an analyst can do right now, artificial intelligence, ai, how does it fit into this market broadly? I guess I’ll start with, but I want to add on something there, and I think that it’s important that the question that I always have is, what about the human element? What about that super bright analyst, right? So how does this market deal with artificial intelligence, use it to accessibility, but also make sure that we’re using the institutional knowledge and history of the analysts. Can they be married together? Does it work that way?

Stephen Winterstein:

Well, first, I think they can, yes. And I’ve said this many times, and I’ll repeat it, spreadsheets didn’t do away with the need for mathematicians. It just made performing fundamental processes much easier and more productive so that the mathematician or the financial analyst can focus on the things that are important, interpreting data, looking for problems and so on and so forth. And I think the same thing applies in the artificial and data space. And I am by no means an expert in this. I talk to experts, and the way that I like to think of the world is first of all, breaking down artificial intelligence. I think it’s misused, it’s used in very general terms, and I think that it’s better to start defining things. So I think of artificial intelligence. Number one is algorithmic trading. That’s using artificial intelligence. And we know that there are so many firms out there that are successfully providing liquidity and taking liquidity in the municipal space using systematic or algorithmic trading.

And so we know that that works. We have machine learning, which I think of machine learning different in two different strains, if you will. There is machine learning in financial data, and then there’s machine learning and let’s call it natural language processing in reading documents and so on and so forth. So I think that the challenge, of course, is in taking those different subsets of this technology called AI and understanding what it can do and what it can’t do. So let’s talk about machine learning with financial data, and that is largely what’s being applied in algorithmic trading, is that if you think about a really good trader, a really good trader has a great memory, they write things down, they can, they have recall. That’s amazing. Well, if I could take my friend who might be a trader that’s really good at doing that and teach a machine to do all the things that trader can do, but also process thousands and thousands of different factors and come up with a number, that’s a good thing.

Then that trader who’s really good at their job, can actually look at what that machine produces and almost act as, act in the capacity of quality assurance and correct where things are wrong and understand when things are wrong and when things are right. So I think that no matter where we go with this, whether it’s with actual trading or whether it’s with looking at official statements or disclosures and understanding whether we’re getting it right or not getting it right, that an analyst can be very, or a trader can be very useful in that process. It doesn’t mean we’re going to eliminate anybody. It means that we’re going to use their skills where it can really be applied and make a difference.

Alright, Steve, we probably could continue this conversation for the whole afternoon here, but we can’t do that. So what I want to ask you is, is there anything else perhaps that you would like to leave this muni audience with as pertains to technology? What keeps you up at night for good or bad, I guess?

Stephen Winterstein:

Well, having spent probably coming up on 35 years in the industry, I think this is the most exciting time to be in public finance. The most exciting time to be on the buy side, the sell side, any role that you can pick in the municipal market. I think it’s a wonderful time. We have seen technology accelerate over the last 20 years. We’ve certainly seen it accelerate in the last five, and I think the next 10 are going to be as exciting as ever. And I think that we need to have an optimistic view about this. It’s not the technology is taking over and it’s going to destroy jobs and eliminate municipals from the big banks and so on and so forth. I think it’s actually, it’s exhilarating to know that the technology that’s either here or on the floor is setting the stage for us to take all of these things that we’re so difficult and so complex and actually make use of them to be productive, to make our market a better place. That’s my view.

Lynne Funk:

I’ll take it. I like it. I don’t think the muni market’s going anywhere, so I mean, I’m an editor at The Bond Buyer, so it better not.

Stephen Winterstein:

That’s true.

Lynne Funk:

Well, thank you so much, Steve, for your time. Really appreciate it and your insights. I know that we’re going to continue this conversation, no doubt. So thanks again,

Stephen Winterstein:

Lynne. It’s always good being with you. Thank you.

Lynne Funk:

Thank you for listening to this Bond Buyer podcast. I produced this episode with audio production by Kelly Malone Yee. Rate Us, review us and subscribe to our content@www.bond buyer.com/subscribe from The Bond Buyer. I’m Lynne Funk, and thanks for listening.