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Driving Evolution in Financial Markets: Don’t Unnecessarily Re-Write The Rulebook

Traders Magazine Online News, October 30, 2018

Andy Bria

As those of us in the industry know all too well, you would struggle to find a financial market as resistant to change as US Treasuries. Enhancements to the rigid bifurcated market structure have been notoriously difficult to implement, with both dealers and customers feeling increasingly constrained by technology and regulation

While the USD 14.5 trillion US Treasuries market stands out for its stubbornness in the face of evolution, the problem is certainly not unique to this sector. Across capital markets, the way in which banks, funds and other professional trading firms interact and trade with each other is changing. Notably in the bond markets, post-crisis regulation has significantly dimmed dealers’ appetite for acting as middlemen.

While each market has its own unique nuances, new trading models that have proven successful in driving evolution in one market are often the best starting point to addressing the challenges in another.

In US Treasuries – a market that not too long ago still relied on fax machines and voice trading – a new model is steadily growing in popularity as participants recognize its natural fit for the way they need to interact in order to maximize profits in today’s trading environment.

This directed, disclosed model enables peer to peer streaming between all types of participants, breaking down the traditional bifurcation between the dealer-to-client and dealer-to-dealer segments. But while this model is revolutionary in US Treasuries, its origins are actually rooted in another market entirely – FX.

The same trend of the erosion of barriers between client types, where firms were often no longer just a provider or a consumer of liquidity but both, had already taken place in the FX market some years earlier. A number of models had been tested in an attempt to tackle this challenge in FX and, leveraging second mover advantage, US Treasuries participants were able to apply the most effective one to the same evolution that was taking place in their market.

In US Treasuries and across the wholesale financial services industry, competing for attention in the face of an established infrastructure is a grueling and arduous task. Taking a model with a proven track record of success in a different but comparable market greatly reduces the risk and barriers to entry in another.

A common thread of the emergence of new technology and the desire to innovate is currently driving change across all financial markets. Banks want to explore new distribution methods to service their customers, and non-bank participants are increasingly seeking the technology to enable them to become sources of liquidity provision.

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