U.S. Treasury Market's Evolution Likely to Bring More Price Transparency

(Bloomberg) -- The U.S. Treasury market’s walls may be coming down.

While U.S. debt has long traded in one of two ways -- banks buying and selling among themselves, or sales to customers -- that distinction is eroding, with the inclusion of proprietary trading firms in the bank-only segment and increased adoption of streaming prices, according to new research by Greenwich Associates analyst Kevin McPartland. The likely impact: a clearer picture of where prices stand at any given moment.

“Transparency should continue to get better across the board,” McPartland said in an interview. The ease of trading should improve as well, as more participants gather in fewer places, which could help make it easier for investors to buy Treasuries that aren’t the newest issued, known as off-the-run Treasuries, he said. “If we continue to see these improvements in on-the-run markets, we will see improvements in the off-the-run market.”

Adding transparency to the $15.6 trillion market has been a goal of U.S. Treasury Department officials for several years, after a 2014 price spike sent yields plunging almost five standard deviations. Treasury officials met earlier this year with market makers and other electronic trading firms to discuss how to improve the market, and are working on a way to publicly report Treasury bond prices for the first time. Regulation of Treasuries remains fragmented, and hasn’t kept up with recent technological advances used by most market participants.

Calls, Messages

Phone calls and instant messaging are still the preferred method for traders, according to McPartland. That segment comprised about 39 percent of trading on a volume-weighted basis, equivalent to an average of $164 billion a day this September. Electronic trading is dominated by CME Group Inc.’s BrokerTec, with about $150 billion a day in September, while Nasdaq Fixed Income, formerly eSpeed, has traditionally made up the other part of the bank-only electronic trading, with $46 billion a day.

McPartland previously put BrokerTec and Nasdaq Fixed Income into the bank-only category when determining market share, with dealer-to-client services Bloomberg LP, Tradeweb Markets LLC and others in their own segment. In a change to his methodology, he’ll no longer make that distinction, which shuffles the order of market leaders. In 2016, for example, McPartland had BrokerTec accounting for 67 percent of trading, and eSpeed for 30 percent.

In the all-in calculation he’s doing now, BrokerTec is still first, with 42.6 percent of the electronic market, but Nasdaq drops to fourth, with 8.9 percent. In second place is Tradeweb, with 20.7 percent, followed by Bloomberg, at 20.4 percent. Bloomberg LP is the parent company of Bloomberg News.

Market Data

In an effort to make more information accessible to investors, the Financial Industry Regulatory Authority in July 2017 began collecting market data from its members through its Trace price-reporting system. Currently, Wall Street dealers have complete knowledge of prices and trades, while investors and market makers are in the dark about transactions between banks and their customers, which account for half of all trading.

That lack of transparency also hinders the ability of enforcement agencies to craft coherent policies because they don’t fully understand how Treasuries trade. It took months for U.S. regulators to coordinate and collect data after the 2014 “flash rally” in Treasuries that had no apparent trigger. In a span of 12 minutes, yields for benchmark 10-year Treasuries slid 16 basis points, then rebounded, prompting the first government review of the market since 1998.

More still needs to be done to bolster Treasury pricing and trading transparency, McPartland said.

“Of all the things that should be publicly reported, you’d think that should be,” he said.

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