Metamorphic Market: Transformation in U.S. Treasury Trading

The U.S. Treasury market is the largest and often the most liquid bond market in the world. It has evolved over time from a voice-driven to a hybrid market incorporating multiple trading protocols, including electronic limit-order-book (LOB) and request-for-quote (RFQ) platforms. From a market structure perspective, it remains predominantly bifurcated, separated into wholesale interdealer and retail customer-to-dealer marketplaces.

The evolving regulatory environment is forcing changes across the banking industry, and change is descending upon the U.S Treasury market. As large banks grapple with new capital adequacy requirements, and low-margin businesses are increasingly harder to manage, structural changes are beginning to take shape. In this TABB Group report, Metamorphic Market: Transformation in U.S. Treasury Trading, TABB Group looks at the manner in which market-makers are moving U.S. Treasury risk through the financial system, the difficulties confronting primary dealers, and the emergence of non-bank market-makers as the driving force behind interdealer liquidity. We also delve into the use of “speed” as a vital tool for managing and hedging market and liquidity risk, and the development of technology-driven decision and market-making.