Key trends to track in US government bond dealing

Published on 18 June 2019

Kevin McPartland, managing director of analyst firm Greenwich Associates, sees real change in the way buy-side traders can achieve their execution objectives, thanks to innovation in the US Treasuries market. Trading protocols are changing as models such as streaming prices are fully integrated into trading workflows, opening up new execution paths for traders.

Dan Barnes Welcome to Trader TV Fixed Income – your insight into the trading climate for professional bond investors. I’m Dan Barnes. The efforts of interdealer, treasury-dealing platforms to attract buy-side trading have been patchy at best, but new competition in the space is upping the ante. As new markets open, buy-side traders will need to consider what they offer in the way of better execution. With me is Kevin McPartland, managing director of analyst firm Greenwich Associates, to map out this new environment. Kevin, welcome to Trader TV.

Kevin McPartland Thank you so much for having me.

Dan Barnes Given the profile of US Treasuries – relatively liquid, pricing is quite transparent – what does that mean buy-side traders are looking for in their execution?

Kevin McPartland You raise  a good point, and you’re right. The majority of the market, which we call on-the-run, is very liquid, there’s only a handful of instruments, they trade very frequently, and they make up the vast majority of trading volume. The needs there are quite a bit different than for off-the-run treasuries that are quite a bit less liquid. They make up a lot less of the average daily trading volume, but they make up the vast majority of the bonds outstanding. So, that’s something I think that we should keep an eye on as well. On the off-the-run side, they act a bit more like semi liquid corporate bonds, than they do the very liquid on-the-run treasuries. For the buy-side, ultimately, they want to be able to execute when they need it, how they need it. So, if they’re very interested in getting an order done quickly, they want to be able to do that. If they want to execute an order with limited information leakage, they need tools to be able to do that. If they have large positions that they need to either buy or sell, again, they need mechanisms to do that. We’ve seen in other markets that sort of have very narrow rules about trading protocols, US equities, to some extent, the futures market. It can be hard to do some of those things because you have to stay within those bounds. I think the bond market, because it’s evolved so organically without much regulatory intervention, has sort of seen a lot of tools and trading protocols evolve in such a way, that they really do provide the market what they want, and what they need.

Dan Barnes Based on your research, how do you see trading activity changing?

Kevin McPartland I think there’s four major channels of trading, if we can break it down that way. Thinking about the market, you have the voice market, which still accounts for roughly a third of trading, and that changes month over month, based on volatility and total volumes and such. Then you have central limit order book trading, which was traditionally the interdealer market, but increasingly that sort of name isn’t quite appropriate anymore. You have some some buy-side in there, you have a number of non-bank liquidity providers in that market as well, both the sort of common platforms, and some of the new entrants have opened up a bit more to a broader audience. You then have the request for code of the RFQ markets; this is where most of the traditional deals with the client trading happens. And then last, but not least, I think what people are talking about the most lately is the market where people are trading with bilateral streams, and that can go either directly between the counterparties, or I think, increasingly more often the case, through one of the trading platforms to access the plumbing to help the prices get from the dealers to the liquidity takers, and then the executions go in the other direction. And that seems to be really where a lot of the talk is these days.

Dan Barnes Effectively, we’re likely to see better execution as buy-side traders get more choice?

Kevin McPartland Yeah, I think as the market, there’s more competition amongst the trading platforms. I think the non-bank liquidity providers have also created a more competitive environment in the dealer community. And this is sort of old fashioned markets talk, right. This is, more competition will ultimately lead to better service and better pricing. You know, what the market is trying to avoid is with all of that new choice, also come some new complexity. So, electronic trading is great for efficiency. It’s great for eliminating errors. However, there’s a lot of sort of connectivity that underpins that, things happen much more quickly than they would have in the past if you were just making a phone call. So trying to find that good balance of choice and efficiency, while not overcomplicating things, will be critical in the next couple of years.

Dan Barnes Which trends are you following at the moment? And which are you most excited about in the Treasury space?

Kevin McPartland So the firms that can gather data the best, gather the most and then find some ways to action it, to put the right analytics on top of that. To help, whether it be pre-trade analysis, post-trade analysis, within some kind of execution algorithm to respond to RFQs in an automated fashion, to automatically update a bid and offer on an order book. All of that relies on very precise and consistent data. So that’ll be something for folks to focus on. And then we’ve written about it a lot and talked about a lot, but I do think that the developments with direct streaming prices, I think that will be something that’s worth keeping an eye on. There’s a number of different approaches to that, different trading platforms that are focused on adding their own flavor to it. There is some opportunity for buy- and sell-side to connect with each other directly. So, all of that should be really, really interesting. And it does provide, in some ways the best of both worlds, between order book and RFQ, where you have that sort of point-and-click, or algo execution abilities, but you still know who you’re trading with and have some control over your counterparties and what they see.

Dan Barnes Kevin, thank you very much.

Kevin McPartland Dan, it was a pleasure to be here.

Dan Barnes I’d like to thank Kevin McPartland of Greenwich Associates, and of course you for watching. To catch our monthly reports on other markets or to subscribe to our newsletter, go to TraderTV.NET.