Bond Dealers Beat Flash Boys in Treasuries Trading With Clients

  • Banks, brokers are primary trading partner for investors: Tabb
  • ‘Golden Age of Execution’ for asset managers, consultant says

A Dangerous Bond-Market Situation Looms, Warns Gilbert

Bond dealers have been bruised but not broken amid the Treasury market’s post-crisis transformation, Tabb Group found.

Even as proprietary trading firms have assumed a dominant role in the interdealer realm, they’ve made few inroads with the market’s end users -- asset managers. Banks and securities companies were the primary source of liquidity for a combined 91 percent of that client group, and proprietary traders –- such as high-speed automated firms –- for a mere 2 percent, according to a report the consulting firm released Tuesday.

For Tabb, the findings suggest that although new regulations have raised dealers’ capital costs and led them to shrink debt inventories, it hasn’t necessarily become harder for investors to trade U.S. federal debt. The question of dealers’ evolving role has become a topic of debate after a period of unusual volatility in October 2014 spurred the first government review of the Treasury market since 1998.

“Our research demonstrates that dealers continue to provide almost all of the liquidity sought by end-investors,” according to analysts led by Anthony Perrotta.

For its report on trading in the $500 billion-per-day market, Tabb relied on interviews with dealers, large asset managers, hedge funds and trading venues.

Upstarts’ Challenge

The notion that banks still have a lock on a major chunk of Treasuries trading might not get any argument from the upstarts struggling to gain a foothold in the world’s largest bond market. Alternative trading platform Direct Match Holdings Inc. shuttered last month after failing to secure a partnership with one of the dealer banks that act as gatekeepers for the Treasury market’s back-office clearing and settlement plumbing.

In the interdealer market, proprietary trading firms, which buy and sell with their own capital and are less subject to regulation, have had more success. They’re connected to about 60 percent of trading in that segment, according to Tabb. The firms’ achievements in that area sparked speculation they’d attempt to capture buyside business as well.

Instead, the largest banks were the primary source of liquidity for 73 percent of end users in Tabb’s analysis. Smaller banks and securities dealers accounted for an additional 18 percent.

“While liquidity may be different, it doesn’t appear that the market is broken,” Perrotta wrote. Given the market’s efficiency and tight spreads, “by many standards, it is the Golden Age of Execution for asset managers,” at least in terms of the most-traded Treasuries.

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