By Katy Burne
A host of companies are vying to set up new electronic networks
for trading U.S. Treasurys, the latest upheaval in a $12.5 trillion
market already being reshaped by some large banks' pullback and the
growth of fast-trading firms.
The efforts highlight the shifting role of banks, and gyrations
in the market as the Federal Reserve prepares to lift interest
rates in the months ahead.
Traditional Treasury trading is now widely viewed as "antiquated
and rigid," said David Light, a former head of government-bond
sales at Citigroup and co-founder of CrossRate Technologies LLC,
which is launching one of the new venues. "It simply did not evolve
with all the changes in technology and regulation."
Currently, there are two main channels for trading Treasurys on
screens. Banks trade opposite their asset manager and hedge fund
clients, with identities disclosed, via either Bloomberg LP or
Tradeweb Markets LLC.
The banks then trade with other banks and professional investors
anonymously, in exchange-like systems on either BrokerTec, owned by
broker ICAP PLC, or eSpeed, owned by Nasdaq OMX Group. The banks
trade with other banks in a wholesale market on one set of prices;
they trade with customers on another set of prices.
New regulations targeting bank risk-taking are prompting some
banks to de-emphasize bond trading, putting the old model under
threat and opening the door to new links between participants.
CrossRate, expected to launch later this year, will match up
banks and high-frequency trading firms on one platform with
customers, disclosing the identities of traders only after a
transaction has taken place, said Mr. Light.
LiquidityEdge LLC, a broker dealer newly formed by David Rutter,
the former head of electronic brokerage at ICAP, plans this summer
to launch a way for algorithmic trading firms to stream Treasury
prices on a disclosed basis directly into bank trading floors, said
people familiar with the matter. Banks can stream to other banks or
non-banks.
The gateway, which licenses technology from State Street-owned
currency platform Currenex, promises to simplify the connections
between banks and computer-driven trading firms that are expanding
their presence in Treasury trading, something individual firms may
find expensive and time-consuming to coordinate themselves, the
people said.
ICAP has been talking to banks and high-frequency trading firms
about supplementing its BrokerTec business, in part acknowledging
that changes in the market may pressure volumes, said separate
people familiar with those discussions. eSpeed volumes in the first
quarter were down 16% year-over-year, according to data from Nasdaq
compiled by researcher Sandler O'Neill + Partners; BrokerTec's were
flat.
Nasdaq executives are approaching the changes not by changing
the structure of eSpeed, but by creating new instruments to trade,
in some cases with lower trading fees.
Whereas the existing BrokerTec matches up professional buyers
and sellers anonymously, the additional method to be called
"BrokerTec Direct" will give banks and high-frequency firms a way
to distribute Treasury prices on a disclosed basis, after they have
chosen to trade with one another. The plans are borrowing from the
growth in ICAP's currency trading platform EBS, which rolled out
EBS Direct in 2012.
Jim Greco, the former vice president of rates trading at
Jefferies, is planning to launch in the third quarter Direct Match,
an exchange-like system for anonymous trading between any and all
market participants in Treasurys, including client-to-client
trading.
Before joining Jefferies, Mr. Greco built a Treasury algorithmic
network called GETDirect for high-frequency trading firm Getco, now
part of KCG Holdings, allowing banks to trade directly with KCG. In
April, Direct Match raised about $3 million in seed funding from
technology firms, including IA Ventures which invested $1.5
million.
Direct Match "is geared toward unlocking trapped liquidity on
the buy side," said Roger Ehrenberg, managing partner at IA
Ventures.
The flurry of new initiatives for Treasurys echoes efforts under
way by as many as 18 trading systems operators to revolutionize the
$7.8 trillion corporate bond market, where trading has been stymied
by many of the same regulatory shifts and investors have turned to
screens to find a wider array of orders.
The majority of Treasury trading between banks and other
professional traders is already electronic, while in corporate
bonds it is around 15%. About 60% of the professional segment in
Treasurys constitutes computer-driven trading firms, up from about
40% in 2010, according to researcher Tabb Group.
While trading in U.S. Treasurys isn't currently suffering from
the same dislocation in corporate credit, analysts have pointed to
a recent increase in price swings in government debt, attributing
this partly to the rise of speedy trading firms and the banks'
retreat.
Banks also have new efforts under way for distributing Treasurys
prices. Morgan Stanley in February launched "MSBOND," providing
clients with a new way to trade Treasurys anonymously, either with
the bank or between clients and other clients, a person familiar
said.
Citigroup Inc. has "Citi Velocity," which pumps Treasury prices
out to clients but also to a range of small and midsize securities
dealers on a disclosed basis, another person said.
Credit Suisse Group AG recently inked a joint venture called
"Wake USA" with high-frequency trading and technology firm Tower
Research Capital LLC to expand its market making in U.S. Treasurys
and bond futures.
Write to Katy Burne at katy.burne@wsj.com
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