Banks advance electronic Treasury trading

NEW YORK & LONDON, February 15, 2011– Algorithmic trading functionality has finally moved onto buy-side fixed income (FI) trading platforms, says TABB Group in new research published today. Building on the recent overhaul of their internal infrastructure, including liquidity aggregation technologies and auto-quoting logic, a number of major banks are taking the next step in today’s e-trading evolution by putting algorithms directly on their institutional clients’ desktops.

Although algorithmic trading in the liquid fixed income market has been discussed for years, says Adam Sussman, a TABB partner, director of research and author of the new report, “Treasury Trading 2011: Automating the Yield Curve,” major dealers are launching a new generation of trading functionality aimed at bringing a greater amount of automation and sophistication to the buy side.While dealer-to-client (D2C) electronic trading has existed in the form of single- and multi-dealer platforms for the past 10 years, “these new marketed solutions are intended to streamline the execution process through support for limit prices (or spread); algorithmic functionality for multi-leg and cross-asset class orders; implementation of enterprise-wide liquidity management; and automated quoting and internal trade matching.”

According to Sussman, four dealers, each known as a leader in FI, e-trading or both, continue to pour investments into overhauling their FI infrastructure, aggressively pursuing an automated, technology-driven, volume-based business model, also known as flow monsters. Most of the recent focus has been on Treasury notes (T-notes) where overall trading volumes have held up well over the last few years, growing at a 5% compound annual growth rate since 2002. Based on TABB Group estimates, the client component of that volume has been steadily rising during that same time period, from 54% in 2002 to 58% in 2010.

The initial source of demand for this algorithmic functionality is coming from tradessuch as switches, curves and basis, says Sussman, trades that depend on the efficient execution of two or more securities, limited for now to Treasuries and related futures or swaps. “This new functionality allows traders to pinpoint the amount of risk exposure they’re willing to take on in order to get filled. They can take on more risk in order to put the trade on more quickly or only accept a narrow range of exposure.”

Another twist in the story is the potential impact of derivatives reform on how the cash market trades. The transformation of the swaps market to a more open, transparent market could have unexpected consequences. Banks might seek additional opportunities to aggregate internal liquidity for the purposes of quoting tighter swaps spreads on the Swaps Execution Facility (SEF).The buy side might move more of its rates trading to multi-dealer platforms in response to regulatory reforms. And arbitrage opportunities could increase along with access and transparency, thus driving turnover frequency and volume.

But one thing is clear, he says, “Everyone knows that they can’t afford to sit still. The opportunities in this space are as never-ending as the US federal government’s current debt.”

The 18-page research note with 7 exhibits, based on one-to-one, interview-based conversations with primary dealers, brokers, interdealer brokers, proprietary trading groups, hedge funds and long-only asset managers examines liquidity aggregation; auto-quoting; algorithmic spread trading; buy-side attitudes toward electronic trading; the impact of SEFs on the cash market;and recent product announcements from a number of dealers. It also sizes the portion of Treasury trading that occurs electronically versus the phone and how much market-making is fully automated.

The report is available for download by TABB Group Derivatives Research Alliance clients and pre-qualified media at For an executive summary or to purchase the report, visit or write to

Related US Treasuries research at TABB includes “On-The-Run Treasury Notes: The Benefits of a Tiered Market Structure.” Written by Sussman, it gives a detailed description of US Treasury market structure for on-the-run notes, from the distribution of primary issuance to the dealer-to-client (D2C) platforms. The report drills down into the interdealer platforms, detailing who accesses those markets, how they do so and how changes in matching logic are making platforms look less like auctions and more like order-driven price/time markets. The report also examines how automation in banks’ liquidity provisioning functions is impacting the liquidity discovery process on the D2C platforms.

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