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Treasury Trading Evolves with Bilateral Streaming
Traders Magazine Online News, August 23, 2018
By Ivy Schmerken, Editorial Director
Electronic trading in the US Treasury secondary market is evolving and shifting, as non-bank liquidity providers and dealers participate on venues that offer bilateral streaming on a disclosed basis.
Non-bank liquidity providers and some dealers are actively participating in venues that support bilateral streaming, according to a Greenwich Associates webinar, “U.S. Treasury Trading: Where We Go From Here.”
Aggregated streaming is emerging as a significant protocol in electronic trading of US Treasury bonds, according to webinar speakers, which examined the impact of this trend on market participants.
While close to 70% of the volumes in the US Treasury market are traded electronically on a system, the market is split between two segments: dealer- to -customer trading and dealer- to-dealer trading.
“The interdealer market is considerably more electronic, whereas the dealer-to-customer market is more split,” said Kevin McPartland, head of market structure and technology research at Greenwich.
In the wholesale D2D market, 6% of Treasury trading is voice and 84% is electronic. In the dealer-to-client market, 47% is voice and 53% is electronic, according to Greenwich data.
Some have complained about a bifurcated market structure preventing the buy side from accessing large pools of liquidity in the interdealer platforms.
“What we see is the two-tier structure being challenged by the emergence of new trading models,” Nichola Hunter, CEO at LiquidityEdge LLC, speaking on the webinar. LiquidityEdge is a new interdealer trading venue that provides direct streaming to customers on a disclosed or anonymous basis.
“Until very recently, there has been very little change in the market structure. Dealers and customers have been constrained by the bifurcated construct. That is at least changing. I think technology and the desire to innovate is what is driving that change,” said Hunter.
What’s driving the surge in bilateral streaming? “Banks want to explore new distribution models for their customers,” said Hunter. “Change is driven by the growth of non-bank liquidity providers as important sources of liquidity,” she said.
There are also a couple of incumbent bank names that grew up in the BrokerTec and Nasdaq fixed Income (formerly eSpeed) world that are looking at alternatives, said Mark Bruce, Head of FICC at Jump Trading, one of the largest US Treasury trading firms providing bilateral streaming on LiquidityEdge.
In a live poll during the webinar, 52% of the audience predicted that aggregated streams would be the most successful protocol over the next three years, while 31% said central limit order books, 11% chose RFQs, 5% picked auctions and 2% said bilateral communications (i.e., phone and instant messages).
McPartland said the traditional dealer-to-dealer and dealer-to-client markets are merging, with other panelists echoing his view.
“We definitely see the bifurcation trend of D2C and D2D blending,” said Eddie Wen, managing director at JP Morgan, who spoke on the webinar. Clients are moving a lot of their business to electronic trading, and once they do that, the business generally stays in electronic trading,” said Wen.
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