The electronically traded US Treasury market might be inching closer towards the cash equities markets regarding operational transparency and system integrity oversight based on a panel discussion held during the Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee meeting.
The panel moderator raised numerous questions about whether the inter-dealer brokerage market would benefit from regulations similar to equities market’s Regulation ATS and Regulation System Compliance and Integrity, which provides investors with descriptions of ATS platforms operations and informs the SEC of any security or control breaches affecting regulated platforms.
Driving the regulator’s concerns was data issued by the Federal Reserve Bank of New York that cited approximately 40% of the total volume of Treasury bonds traded between August 1, 2017, and July 2018 traded on electronic interdealer-trading platforms. Additional data from the Department of the Treasury also revealed that principal-trading firms represented around 60% of trading volumes on such platforms.
Although primary dealers like Citigroup are overall content with the current market structure, there is room for improvement regarding operational transparency, according to Deirdre Dunn, managing director, head of North America markets and securities services at Citigroup.
“There are times that we have only found about changes to matching logic because it changed the way we needed to connect to the system physically,” she said.
However, Dunn recommended that SEC should not implement any new regulation that would not counterbalance its material benefit for the electronic market.
Representatives of trading-platform operators CME Group and Nasdaq noted that despite the increase in electronic trading and the growing presence of PTFs, US Treasurys remain an over-the-counter market and lack much of the complexity of the cash equities market.
“It has a simple order book, and there are not multiple ways to connect that would have a different response,” said Ted Bragg, vice president, head of US fixed income and execution access CEO at Nasdaq.
The Treasury market also lacks the equity markets’ matching-engine interconnectivity, which adds to its resiliency, said Dan Cleaves, CEO of BrokerTec NA.
If one trading venue were to go down, it would not affect the price discovery as much if a venue trading futures on Treasuries went down, he said.
Electronic trading has improved the efficiency and velocity of the on-the-run Treasuries trades, but the market for off-the-run treasuries is an entirely different beast with its own characteristics, according to Shawn Bernardo, CEO of TP ICAP SEF.
‘“We are talking about hundreds of items that may trade per day that do not lend themselves to API-driven high-frequency trading that happens in the on-the-run market,” he said. “It’s a slightly different market. I would say that 65% of the trading that we do is still voice.”