Covid-19 Disrupts Innovation in US Treasuries Market

Electronic trading in US Treasuries has grown steadily over the last decade, with over 60% traded on electronic venues in 2019, but since March, markets have witnessed unprecedented disruption and the Covid-19 outbreak has curtailed innovation, market participants say. As firms have cut spending amid the economic fallout from the pandemic, there has been a lull in the adoption of new execution offerings.

“A large part of it is down to the market conditions, and remote working isn’t really that conducive to innovation and trying new things,” said Nicola Hunter, head of rates at MarketAxess. “Desktop real estate is at a premium in your home offices, so launching new venues, new screens, and coding to new APIs and new protocols has absolutely been hindered over the last six months, as people have just been trying to catch their breath.”

The US Treasury market, valued at around $20 trillion in US government bonds, weathered unnerving disruption and volatility in March. Speaking during a Greenwich Associates webinar this week, Hunter described the chaotic scene at the moment when the market “fell off a cliff” and was “muted” as trading screens displayed a massive drop in yields and pricing information. Although the volatility has ebbed, market conditions are nowhere near normal, as pandemic-related restrictions have continued in many parts of the world and front-office teams continue to work remotely.

The new world order means that pushing for innovative projects or new protocols is a much harder task. Pre-Covid, direct streaming accounted for 7.6% of electronic trading volumes, up from virtually zero five years ago, according to Greenwich Associates research. In the last few months, the use of streaming has been mostly flat, as it competes with other protocols, like requests for quotes (RFQs) and the central limit order book (CLOB), for desktop real estate.

“I think we’ve definitely seen an increase on the RFQ side, and we have seen a bit of a flattening out on the streaming side,” said Jamie Mortimore, director of systematic trading at JP Morgan, during the same webinar. “I think from our perspective that seems to be because there’s still a bit of stickiness around the use of RFQ and I think one of the reasons is that clients are having to use one system for on-the-runs [Treasuries] and perhaps for the old [issued bonds, i.e. off-the-runs], and another system for everything else like bills, tips, and the rest of the securities universe. It doesn’t necessarily work from a client perspective so well.”

The solution to the competition for desktop real estate is to integrate streams into traditional buy-side order management systems (OMSs) or execution management systems (EMSs). The aim of this is to integrate streaming into existing trader workflows and offer easy access to different protocols alongside RFQs, CLOBs, and others. But for now, there is a long way to go before the bulk of the buy side gets to that point, and until it does, appetites could wane.

“The difference between RFQ and stream is not that significant to me,” said Michael O’Brien, director of global trading at Eaton Vance. “An RFQ and a stream to me are largely the same things: one is on-demand and one is on-request. I can see from a dealer or liquidity provider perspective, why those are very different products, but from a buy-side perspective, I’m not so sure.”

The reason for this is that most asset managers still do not have the technology to optimize streaming protocols, said O’Brien. And for that, many will not see a difference in using RFQs and streaming until that changes.

While most asset managers use RFQ and the CLOB for electronic trading today, the hope is that streaming protocols will enhance automation and enable investment firms to leverage algorithmic execution. Hunter said the move to incorporate streaming into workflows will be an incremental process, rather than a so-called big bang. 

“When it comes to streams, it’s an evolution, not a revolution; it’s not an either/or—it can be a blended experience,” she added.

Some of the largest market operators in US Treasuries include CME, Tradeweb, and MarketAxess, with its recent acquisition of LiquidityEdge in November. Tradeweb and CME’s BrokerTec offer streaming liquidity for the corporate bond market, and MarketAxess will launch its protocol by the end of the year.