(Bloomberg) -- The municipal-bond market has been one of the slowest areas of the fixed-income universe to shift to electronic trading. But as Bank of America Corp. sees it, there’s plenty of scope for that to change. 

Electronic platforms have the potential to triple the share of turnover they handle in US state and city debt — from an estimated 14% now — reaping $1.6 billion in annual revenue, analysts at Bank of America said in a report this month that assessed the prospects of e-trading in various bond categories. 

There are substantial hurdles to electronification in the $4 trillion muni market, which encompasses about 50,000 borrowing entities nationwide. There are also roughly a million outstanding muni securities, compared with 40,000 for US corporate bonds, according to the bank. 

“With that said, we do believe this is an asset class that can eventually electronify,” BofA analysts including Eli Abboud and Craig Siegenthaler said in the report. “It is dominated by retail participants and ticket sizes are very small, which generally lends itself well to e-trading.”

E-trading venues handle almost 40% of the turnover in US investment-grade corporate debt and roughly 60% in Treasuries, BofA estimates. In comparison, the tally exceeds 80% for equities, futures, credit default swaps and options. Most trading in fixed income still occurs over the phone or chat, BofA’s report says. 

The experience in other markets shows how the increased adoption of electronic trading can boost overall turnover, according to BofA.

“Electronification decreases the cost to trade and facilitates the entry of electronic market makers, which tends to turbo-charge trading velocity,” Abboud said in an interview. “Other asset classes have seen volume triple or more in the aftermath of electronification.”

BofA is the latest Wall Street bank to highlight bullish implications for fixed-income from electronic trading. By boosting liquidity in corporate bonds, e-trading is shrinking the extra yield that investors get for holding infrequently traded bonds, pushing some investors into private debt markets for higher rewards, according to Barclays Plc.

Considering the prevailing fees and the volume of muni turnover, BofA estimates the market could produce annual revenue of roughly $1.6 billion for trading platforms, an increase of about $1.4 billion from current levels. 

For fixed-income broadly, “a sea change is underway, and the migration toward electronic trading represents a huge monetization opportunity for certain firms,” the BofA analysts wrote. Municipal bonds, along with syndicated loans, “are in the earliest innings of electronification.”

Emerging as the early leader in muni e-trading is Intercontinental Exchange Inc., with an 8% market share last year, followed by 3% each for MarketAxess Holdings Inc. and Tradeweb Markets Inc., according to Bank of America. Bloomberg LP, the parent company of Bloomberg News, offers its own fixed-income trading services.

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