Interdealer Brokers Quietly Plan Joint Ticker For Treasury Prices

One of several versions of the Reuter Dealer Trading System is intended for the U.S. government securities market (TST, September 14). The screen of its 80386-based terminal contains a window designed to carry a ticker of Treasury prices.

A ticker of Treasury prices? Yes, but whether Reuters Holdings PLC will have anything to put in that window depends on the long-delayed General Accounting Office report on the interdealer brokers and on the Justice Department's continuing antitrust investigation.

Several brokers have prepared a contingency plan should the government call for wider distribution of broker prices. They plan to form a joint company that would disseminate last-sale prices -- at the very least -- and possibly bid/ask quotes.

Under the plan, sources say, none of the brokers would install screens in the retail market, nor would the new company build its own network. Instead, the so-called "Newco" would be more like an exchange, providing its Treasury ticker to quote vendors for redistribution. Each terminal carrying the prices would be assessed an "exchange" fee.

Participants in Newco are said to include RMJ Securities Corp., Garban Ltd., and Chapdelaine & Co. Government Securities Inc. Sources say Fundamental Brokers is weighing the proposal, pending resolution of its ownership.

Fundamental is owned by William Street Brokers Inc., which Quadrex Holdings Inc. has agreed to purchase from British & Commonwealth Holdings PLC. William Street is part of Mercantile House Holdings PLC, which is itself being acquired by British & Commonwealth.

Cantor Fitzgerald Securities Corp. appears to be barred from contributing to the Newco ticker under its exclusive agreement with Telerate, Inc. That agreement prohibits Cantor from giving its quotes to another vendor and prevents Telerate from carrying another broker's prices. Unlike the other interdealer brokers, Cantor distributes its quotes to the retail market.

Serious questions persist as to whether the brokers have the right to sell bid/ask information given to them by the primary dealers, but precedent exists in Cantor's arrangement with Telerate.

An integrated feed of interdealer brokers' prices could come about in either of two ways. First, the GAO report could act as a catalyst for the Treasury Department or Congress to mandate greater access to broker screen prices. Second, such a ticker could be stipulated as part of a consent agreement to settle the Justice antitrust investigation.

The brokers would band together to produce a ticker only under two conditions, sources say: (1) if the government demands wider distribution of Treasury prices, and (2) if the proposed company obtained status under federal law similar to that of a securities exchange or NASD.

Although the brokers are being investigated for possible antitrust violations for limiting access to their services and quotes, they would most certainly run afoul of antitrust law by forming a joint company to disseminate prices.

Currently, the brokers supply screens at no cost to the primary dealers and firms recognized by the New York Fed as aspiring dealers. The primary dealers use the brokers to trade anonymously. While there is no clearing house to guarantee transactions, a dealer has the confidence of knowing that his counterparty is authorized to deal directly with the Fed.

By banding together in a separate entity, they would make it difficult for dealers to single out any one broker and put it "in the box" by refusing to do business with it.

However, it's possible the primary dealers could bypass the brokers altogether and return to a telephone market. Brokers currently handle about half of the $100 billion in government securities traded daily by primary and aspiring dealers.

The dealers could also channel more of their business to Liberty Brokerage Inc., the discount broker founded by Citibank and Salomon Brothers and now owned by a number of dealers.

Broader access to broker prices would be good news for Reuters, which needs more than assorted primary dealer quotes to provide a good feel for the market. Telerate stands to lose if the consolidated feed becomes a reality, unless it can alter the terms of its deal with Cantor.

Not all purveyors of fixed-income quotes are enthusiastic about a Treasury ticker because it would eliminate the need to cultivate contributor relationships with dealers, which is a major barrier to entering the business. Vendors such as Knight-Ridder's Moneycenter collect and distribute assorted dealer prices.

Automatic Data Processing, Inc. and Quotron Systems, Inc., which distributes a subset of Telerate's prices, certainly wouldn't mind adding Treasury quotes to their services.

While vendors like Reuters expect the GAO to call for wider distribution of prices, it's uncertain whether the study will also recommend that the brokers broaden access to their services.

Widespread dissemination of quotes would bring greater visibility to the inside market, but it wouldn't placate those who've been agitating for reform in the structure of the Treasury market. A firm like Lazard Freres, which doesn't want to be a primary dealer, wants to do more than just see the inside quotes. It wants the ability to trade at those prices. But if brokers were required to act as agents for non-primary dealers, they could lose business from customers that want to trade only with firms reporting to the New York Fed.

Reuters thinks it has the answer to credit concerns in the government securities market. On the RDTS terminal, a window listing system participants allows the user to select the firms with whom he does or doesn't want to trade.

Because RDTS acts as a blind broker, the only time a trader would know that someone didn't consider his firm creditworthy would be when an offer was entered at the same price as his bid or vice versa, creating a locked market. Some interdealer brokers have argued, however, that tampering with the existing system -- where all participants have equal credit standing -- would hamper liquidity and slow down the speed of transactions.

RDTS has a number of other features designed for government securities traders -- several built around individual voice recognition. A user can instruct the system through a standard telephone handset to cancel all outstanding bids and offers, should the Fed enter the market. Voice recognition also allows traders to update prices easily,

Like a human, RDTS can be instructed to "work" an order. If a trader had $20 million worth of a security to sell -- or of a currency in the forex version of RDTS -- the system could be programmed to display the offer in $2 million increments.

After the first $2 million had been taken, another $2 million would automatically be displayed on the screen. The process would continue until the $20 million was sold or the trader decided to change his strategy.

Although the version of RDTS that the Chicago Mercantile Exchange plans to use for night trading won't be ready for another 18 months, sources say the product designed for the government securities market could be rolled out in as little as 90 days.

Reuters won't discuss its plans for RDTS in the Treasury market, but it's safe to assume the automated trading system will not be launched without a price feed from one or more of the brokers.