A new market for trading U.S. Treasuries says it’s looking out for the little guy in the $12.6 trillion business.
The way it usually works, traders on electronic platforms like ESpeed and BrokerTec are anonymous and are armed with the technology to ensure lightning-fast trading. That’s just fine for large investors, who can afford to build the sophisticated, rapid-fire systems required to stay competitive with whomever happens to be on the other side of a transaction.
But smaller Treasury traders can be at a disadvantage if they don’t know who they’re up against. That’s where LiquidityEdge LLC -- founded by former ICAP Plc executive David Rutter -- comes in. The firm plans to allow dealers and investors to stream live prices to counterparts whose identities are known to each other in order to provide a better trading environment, Rutter said in an interview.
“There’s an under-served part of the market such as regional dealers and smaller brokers that find it very expensive and difficult to keep up technologically with larger dealers and faster traders,” said Rutter, who was chief executive officer of ICAP’s electronic broking unit. “To compete effectively on BrokerTec or ESpeed, these smaller brokers have to make a very significant investment.”
LiquidityEdge got registered as a broker-dealer in the U.S. last week and plans to open within about 60 days.
The startup’s impending launch comes at a time of controversy and turmoil in the Treasury market. There have been allegations of manipulation. Earlier this month, people familiar with the matter said the U.S. Justice Department was investigating whether information is being improperly shared by financial institutions that serve as the the market’s backbone. In October, the biggest yield swings in a quarter century undermined investor confidence.
BrokerTec’s owner, ICAP, is working on a service called BrokerTec Direct that’s similar to LiquidityEdge. It will let known counterparties send executable prices to each other, CEO Michael Spencer said in May. BrokerTec Direct is expected to start by the end of the year.
“These new types of alternative liquidity for Treasuries I see as a positive,” said Brad Bailey, research director at Celent, a financial technology advisory and research firm. Treasuries are among the easiest securities to trade, yet “despite that, you’ve seen some gaps lately, so anything to smooth that out will be helpful,” he said.
Treasury bonds trade in one of two ways. Investors often transact directly with a dealer like JPMorgan Chase & Co., where the price and size are negotiated privately and aren’t disclosed to the public. Then there’s Nasdaq OMX Group Inc.’s ESpeed and ICAP’s BrokerTec, where electronic trading among high-frequency traders, dealers and others takes place. Those prices also stay private.
One issue on Treasury systems now is when speed traders change the amount of debt they are willing to buy or sell once they detect incoming orders. Known as “toxicity,” it hinders slower investors who enter the market thinking they can buy a certain amount only to see it disappear.
“It’s like shouting from the rooftops when they come in to trade on existing venues,” Rutter said. “The market moves away, and what appears to be an $80 million offer to sell Treasuries turns out to be only $30 million, which is very frustrating for smaller investors or dealers.”
By knowing who you are trading with, participants will be more likely to provide firm orders, Rutter said. “It’s self-policing,” he said.
Other services that stream live Treasuries prices are offered by Credit Suisse Group AG, Barclays Plc and Citigroup Inc., but those systems are usually only open to the bank’s customers. LiquidityEdge will be open to any institutional investors who want to join.
The LiquidityEdge service will allow investors or banks that are providing quotes to buy or sell the option to review their deal before it is final -- what’s known as a “last look” provision. The practice is controversial in the currency market for enabling brokers to re-examine and cancel trades before they’re executed.
“That’s because LiquidityEdge will offer streaming prices in less-frequently traded Treasuries,” Rutter said.
The Bank of England earlier this month called for greater attention to be paid to last-look practices, which it said are open to abuse.
Rutter said he envisioned LiquidityEdge as adding to existing ways to trade cash Treasuries, not knocking out any competitors.
“We don’t think it will replace the central limit order book of ESpeed or BrokerTec by any stretch,” he said.