Myles Harrington says he and Dan Veres favor the "high-risk approach" over the "prudent approach" to their Pittsburgh business ventures. And it's paid off handsomely.
The pair parlayed a curiosity about the Internet in 1996 into MuniAuction, an innovative system of auctioning fixed-income securities over the Internet. The Downtown firm is celebrating the 10th anniversary of the first such auction: $70 million in municipal bonds issued by the City of Pittsburgh on Tuesday, Nov. 18, 1997.
The firm now known as the Grant Street Group has conducted to date more than 82,000 auctions over the Internet whose securities total more than $9.1 trillion. The firm counts more than 1,800 institutional clients, from the city to the Commonwealth of Pennsylvania to Freddie Mac, the giant housing-finance enterprise.
"I don't think even e-Bay does over $1 trillion a year in volume," said Harrington, 48, co-founder and president of Grant Street Group. "We started out as independent financial advisers and eventually became auctioneers."
"It's like an art auction; you keep raising your bid until you win or lose," said Dan Veres, 46, who co-founded MuniAuction Inc. with Harrington and is chief operating officer.
At one of the firm's auctions, interested underwriters log onto the MuniAuction Web site and bid for the fixed-income security. Participants' bids contain how much they would pay for the securities, along with what interest rates they would yield. For instance, a bid might be $130 million at a 4.8 percent yield.
MuniAuction's system then converts each pair of numbers into an index number that indicates the issuer's true interest cost. It typically takes 15 to 30 minutes to complete an auction, with the lowest number the winner. Securities issuers can audit the process in real time.
"We were the first municipality ever to use the Internet to issue bonds," said Paul Hennigan, who was Pittsburgh's finance director during the $70 million bond offering in 1997.
"The benefit was to the taxpayer in the end," said Hennigan, president of Point Park University, who estimates MuniAuction saved the city more than $1 million in fees and expenses.
"Any time you bring transparency and efficiency to the market like that, it's a good thing," said Steve Lee, president of H.L. Zeve Inc., an investment management firm Downtown. "It leads to fairer outcomes and fairer pricing. And that's the bottom line."
Over the years, Grant Street Group has conducted Internet auctions of bond offerings anywhere from $1 million to about $7 billion, said Veres. A typical auction involves about $10 million in bonds issued by a municipality or school district raising money to put up a building.
The patented process attracted a $6 million equity investment from The Carlyle Group, a well-known private-equity firm. Veres and Harrington bought its minority stake last year and own the firm outright.
Grant Street Group attracted copycats. It won a federal jury verdict against Wall Street's Thomson Financial in October 2006 for infringing on the Pittsburgh firm's Internet auction patent. A federal judge doubled the award to almost $85 million in August.
At least half the securities auctions that Grant Street Group conducts involve state or local bonds. About 30 percent of the firm's auctions involve debt issued by government-sponsored enterprises, such as Freddie Mac or the Tennessee Valley Authority.
The other nearly 20 percent of the auctions involve tax certificates. Tax certificates are revenue streams from delinquent taxes that are sold by a taxing authority, such as real estate taxes by a county government. Grant Street Group started the business line only last year in Florida and has garnered business in eight counties there.
"We built this thing without a single customer," said Harrington of the software behind its new business line. "We take the high-risk approach: We build it, then sell it."
