Fixed Income FinTech Chapter 14: More e-Trading Platforms for US Govt Bonds

The US Government Bond Market is set to explode…with more e-trading systems.. MarketsMuse Tech Talk continues its curating of fintech stories from the world of fixed income and today’s update is courtesy of WSJ’s Katy Burne, who does a superb job (as always) in summarizing the latest assortment of US Government bond “e-trading” initiatives. MarketsMuse editor note: The financial marketplace is now littered with electronic trading platforms ostensibly designed to enhance liquidity and address the needs of respective market participants.

The once-revered premise of electronifying old-fashioned, non-transparent OTC markets so as to make them fully transparent and in turn, enhance liquidity in a manner that would inspire institutional investors to increase use of those products has, according to many, morphed into a ethernet rat’s nest. There are now almost as many of flavors of institutional electronic trading platforms as there are ice cream flavors from by Ben & Jerry’s and Baskin Robbins combined. Most if not all are ‘accelerated’ thanks to the innovation of rebate schemes, payment for order flow menus, and of course, high-frequency trading (HFT) applications, which has made the market structure more akin to a continuous “Battle of the Transformers.”

Despite the rising concern  on the part of both institutional investors and regulators as to the impact of market fragmentation (the latter of whom are easily-cajoled by the phalanx of lobbyists and special interest groups),  the Genie is not only out of the bottle, it’s reach continues…and the US Govt bond market is, according to those leading the initiatives described below, ripe for ‘innovation,’  for two good reasons. The first is the widely-shared belief that the rates market, which has been mostly range bound for several years thanks to the assortment of QE programs and lackluster economic recovery. is now anticipating a major uptick in volatility, which is a trader’s favorite friend. Secondly, the role of major investment bank trading desks, once ‘controlled’ the market for government bonds, has become severely diminished consequent to Dodd-Frank and the regulatory regime governing those banks and the financial markets at large.

Here’s the opening excerpt from Katy Burne’s column “Antiquated Treasury Trade Draws Upstarts”..

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.

David Rutter, Liquidity Edge LLC
David Rutter, Liquidity Edge LLC

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.

To continue reading this story, click here to go straight to the WSJ column by Katy Burne