Competition in the US Treasury market has been sparse with the number of primary dealers on the decline since the mid-1980s, but according to a research note written by Adam Sussman, Tabb Group’s director of research, new entrants are beginning to emerge.
Although BrokerTec and eSpeed own the on-the-run interdealer broker business and Bloomberg and Tradeweb dominate institutional dealer-to-client trading, Tabb says the combination of record issuance, expected rate hikes and a weakened competitive landscape make US Treasuries a ripe opportunity for mid-tier dealers, independent trading firms and hedge funds, alternative trading venues and the supporting technologies.
“With interest in the US Treasuries picking up – the US Treasury issued more than USD2trn in treasury securities in 2009, more than double that of 2008 and nearly three times more than 2007 – the market is headed toward a rapid growth in trading volume,” says Sussman (pictured).
He adds that as the electronic venues continue their march down the path toward high-speed, streamlined matching engines, expanding into related markets to attract more high frequency and multi-dimensional arbitrageurs, “sparks are going to fly.”
With three main areas poised for change in the dealing cycle – dealer business models, interdealer brokerage and dealer-to-dealer (D2C) platforms – Tabb believes the execution venues will remain segmented, but there will be more fluid interaction between the three.
For IDB platforms, Sussman says that as they push into listed markets, and as interest rate swaps become centrally cleared, electronic treasury trading venues will become homogenized. These trends will have as great an impact on Treasury markets structure as the 2004-2005 automation of Treasury futures contracts, when non-dealer volume on the IDB platforms nearly tripled in a year.
For D2C, the driver of change is the commoditisation of connectivity, says Sussman.
“While it used to be a feat of Herculean proportions to get enough sell-side and buy-side firms on board to create a viable marketplace, the industry is now sufficiently connected that even the most established markets could quickly lose market share. The transience of order flow will drive innovation, operational efficiency and cost reduction, particularly in a market with organic growth.”
