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Greenwich Reports The New U.S. Treasury Market Faces Fierce Competition and Change

Traders Magazine Online News, December 27, 2018

John D'Antona Jr.

The U.S. Treasury market is changing as competition heats up among rival trading platforms, according to a new report from Greenwich Associates that analyzes the players, practices and technology that are re-making this critical market.

Until recently, the market for U.S. Treasuries was actually two: an interdealer market in which intermediaries like banks and broker-dealers traded with each other, and a dealer-to-customer market.

New data from Greenwich Associates shows those divisions are breaking down. The interdealer market now includes more volume from principal trading firms than dealers. Banks are taking in pricing directly from other banks, and the buy side is dipping its toe into markets comprised of aggregated pricing streams and anonymous central limit order books or CLOBs. 

“Although these changes have been gradual, they have now become so dramatic that the traditional labels used to describe the market no longer apply and a new market structure is taking shape,” said Kevin McPartland, Head of Research for Market Structure and Technology at Greenwich Associates and author of U.S. Treasury Trading No Longer a Divided Market.

The Future is Streaming?
Despite all the innovation and change, telephone remains the single biggest trading channel for Treasuries, making up nearly 40% of total market volume. This result underscores the fact that customers still place a high value on their direct relationships and interactions with primary dealers.

However, a growing portion of trading volume across all channels is being directed to the lowest-cost execution option, as opposed to being routed to dealers who provide “high-touch” service like market color and balance sheet to support trades. Banks now win 60% of buy-side trading volume based on best execution, up from 48% in 2015.

This increased focus on price is opening the door to competition among trading platforms and fueling transformation of the U.S. Treasury market. For example, trading via direct streams now accounts for 8% of the total market volume, or roughly $40 billion daily. “We believe that continuous streaming prices aggregated from a chosen group of dealers and market makers will make up an increasing proportion of the electronic market for U.S. Treasuries and, over time, the market as a whole,” said Kevin McPartland.

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