On-The-Run Treasury Trading: Stepping Into Tomorrow

The US Treasury market has gone electronic – now what? More On-the-Run (OTR) treasuries are being traded electronically than ever before, and execution methods beyond request-for-quote (RFQ) are being touted. Dealers have created single-dealer and algorithmic execution platforms that leverage expertise built up in other markets and create an alternative to the multi-dealer platforms that have historically been the venue of choice for real-money institutional investors. Their focus will be on whether the level of buy-in from real money institutions is attainable. The buy side does have concerns over information leakage through RFQs; but most are happy with the trade-off. It proves best execution, satisfying internal fiduciary requirements, and requires little additional investment in technology. Meanwhile, multi-dealer platforms have responded to change by expanding their offering in terms of asset class, execution method and investor type. Finally, the acquisition of eSpeed by Nasdaq OMX has shown how the interdealer platforms, which are also open to independent trading firms, might reposition themselves in a new world.

2013 may be remembered as the year that electronic treasury trading breached the tipping point and complex and algorithmic trading became the norm. All the factors are in place to create the critical mass necessary to enable more automated and complex trading methods. Regulatory change in related markets makes a move in client behavior more likely, as familiarity with more sophisticated trading platforms and protocols in other markets – such as swaps and futures - may ease a transformation in Treasury trading process. The question is: what kind of market will emerge? Of all the cash bond markets, Treasuries are the most likely to achieve the level of standardization necessary for an FX-like market structure to flourish. That said, the challenge will be to prevent a fragmentation of liquidity that has also disrupted the equity and foreign exchange model. The battle lines are drawn and the infrastructure is in place; it is now up to the buy side to help define the new normal.