Lessons from credit: Could all-to-all help Treasury markets?

All-to-all trading is not quite a new concept in fixed income, at least in corporate bonds. But the second half of 2022 saw a bit of buzz-around in policy circles about bringing the model to a worrying sector of the market: US Treasury securities.

In September, Pimco published a research note whose writers recommended that US policymakers use their powers to advance all-to-all in the entire Treasury market. That same month, a former regulator told Waters’ sibling publication Risk.net that a proposal from the Securities and Exchange Commission (SEC) to mandate the central clearing of a large portion of US Treasury transactions could push all securities to all-to-all trading within five years.

In October, the Federal Reserve Bank of New York put out a study on whether the adoption of an all-to-all model could strengthen market resilience in secondary cash Treasury markets. And in November, an interagency working group including the Federal Reserve and the Treasury published a report saying it was studying the costs and benefits of all-to-all trading in the market.

In traditional dealer-to-client markets, banks buy and sell securities on their balance sheets, creating liquidity for the buy side. All-to-all trading, by contrast, allows multiple counterparties in a network to trade with each other, creating new possibilities for investors to access non-bank liquidity.

Buy-siders say the all-to-all model was pioneered by MarketAxess, which has developed the Open Trading network.

“It’s the umbrella term for all of our all-to-all capability: anywhere where someone can trade with someone else without needing a relationship or needing to know who’s on the other side,” says Richard Schiffman, head of Open Trading. “It runs 23 hours a day, five days a week. Anyone anywhere in the world can trade with anyone else without having to worry about whether they have a relationship.”

However, all the major platforms now offer all-to-all capabilities for corporate bonds and other kinds of fixed income. Tradeweb allows all-to-all trading in a range of protocols in connected liquidity pools called AllTrade. In 2017, it launched Blast A2A for US institutional credit. Among Bloomberg’s offerings is Bloomberg Bridge, launched earlier this year, which supports global, intermediated trading for corporate and emerging market bonds.

We thought as a marketplace that all-to-all volume would decline during big moments in the markets, but we actually saw it go up. And regulators and are thinking to themselves, ‘Gosh, why shouldn’t we have that same kind of tool for other products?’

Spencer Lee, TS Imagine

The Covid-19 pandemic cemented the hold that the all-to-all models was slowly gaining over corporate bonds, as volatility stress-tested market structure. Greenwich Associates research found that in 2017, all-to-all trading made up 5% of the corporate bond market. In 2019, it was up to 8%. And in 2020, that jumped to 12% of investment-grade volume. “MarketAxess makes up the majority, with Tradeweb, Trumid Ice, and others also contributing,” Greenwich head of research for market structure and technology Kevin McPartland wrote in a 2021 report.

While 2020’s stress accelerated the evolution of corporate bond trading, it got regulators worried about Treasuries. The Fed says March 2020 saw severe selling pressure on dealers’ balance sheets, causing a sharp deterioration in liquidity conditions, evidenced by rapidly widening spreads and intense volatility. All-to-all seems to appeal to regulators as a possible panacea for these weaknesses.

“I think that part of the reason we’re talking all-to-all in rates now is the success of the protocol during the pandemic,” says Spencer Lee, head of fixed income and chief markets officer at trading software provider TS Imagine. “We thought as a marketplace that all-to-all volume would decline during big moments in the markets, but we actually saw it go up. And regulators and are thinking to themselves, ‘Gosh, why shouldn’t we have that same kind of tool for other products?’” 

Rates market participants were concerned about liquidity for a long while before Covid-19. Due to a combination of factors, such as post-crisis regulation, dealers and buy-side traders say liquidity is impaired, particularly in older, off-the-run securities.

The secondary market for Treasuries is composed of inter-dealer markets, which are mostly trading on their own account in central limit order books (Clobs) on inter-dealer broker platforms, and concentrated on on-the-run securities; and dealer-to-customer markets, where trading off-the-run securities is more common. The problem is that in dealer-to-client markets, dealers must want to make markets, but in times of stress, like 2008 or March 2020, their willingness to do so evaporates.

This is where all-to-all could come into play, say supporters of this approach, by opening up new sources of non-bank liquidity. “In the context of US Treasury securities, having an entirely all-to-all market structure would, at least in principle, merge the inter-dealer segment with the dealer-to-customer segment and allow any market participant to trade any US Treasury security directly with any other market participant,” the New York Fed’s report says.

This would conceptually increase the amount of liquidity available to any one Treasury market participant, offer more transparency of prices, and lower the barriers of entry to a wider array of investors.

Opening floodgates

In corporate bond markets, all-to-all has always been a response to liquidity pressures. The genesis of Open Trading, for instance, was a response to the financial crisis of 2008, when dealer inventory dried up dramatically.

Schiffman has been at MarketAxess since 2000 and has helped to evolve Open Trading from its earliest days.

One landmark in the offering’s development was the financial crisis of 2008, when dealers would not hold securities. In response, MarketAxess introduced an initiative to bring regional dealers into its network, hoping that a lot of smaller firms could fill the liquidity pools left dry by the handful of powerful Wall Street banks that were deserting it.

Schiffman says the program brought in some 80 or 90 dealers, and at its peak, represented about a third of the liquidity on the platform. Buy-siders were not limited in the number of dealers they could approach to form relationships with. But the program had its limitations. A buy-side firm would have to initiate and manage these individual relationships, which was a lot of work.

“So we said, ‘All right, there’s something interesting here.’ If people are willing to share their inquiry out broadly to all those dealers but they still need this relationship in place, the next step was: Why not let investors share their inquiry broadly in the market?” Schiffman says.

In 2010, the company launched Market Lists for corporate bonds, giving institutional investors the ability to display their bid and offer lists anonymously to the MarketAxess trading community. This was the beginning of what became Open Trading. 

Transforming Treasuries

So the question is, then, does it make sense to bring all-to-all models to the highly electronic Treasury markets, and could it be as transformative for that corner of that market as it has been for corporate bonds?

TS Imagine’s Lee says it makes a great deal of sense. However, the buy side is going to need better technology to be able to trade Treasury securities in that manner.

“I think it would be well worth doing, but it will take better tech than what most of the marketplace has right now to accommodate that,” Lee says.

Lee has only been in his new role for three months. Prior to that, he spent 20 years at the coalface of fixed income—mainly in credit markets—including as a founding partner of Agilon Capital in San Francisco and at BlackRock.

Lee says that in the credit world, it could take five to 15 minutes to get responses to a request for quote, and then another five to 10 to respond to those responses. In the rates world, you’ll get RFQ responses back in seconds. Market participants will need tech that responds automatically if they want to compete in all-to-all for RFQs, he says.

Greenwich Associates research published earlier this year found that asset managers are not participating in Clobs as they do in equities, partly because they are not set up to trade bonds in quickly moving marketplaces.

The approach to get more all-to-all trading in US Treasuries could simply be to provide the buy side with access to a Clob, but this doesn’t seem to be what regulators think is the right approach. The New York Fed’s report, for instance, highlighted a number of alternative approaches, such as anonymous RFQ. Anonymous all-to-all order books already exist, Lee says.

Both order book and RFQ could help the liquidity landscape in rates, Lee adds, although there would need to be more detail on how exactly it would work and for what. Would all-to-all mean order book or RFQ? Would it apply to off-the-run or on-the-run securities? Or the inflation-protected securities (Tips) market?

“There are tons of buy-sides out there with liquidity that rests in their daily book. Providing that pool of liquidity, the tools to access those electronic protocols seems to me to be a positive thing. But the way we collectively do that will have to be thought out,” Lee says.

MarketAxess now also offers a central limit order book called Live Markets that it has extended to US Treasuries. “We run a central limit order book, very exchange-like, for trading in both investment-grade and high-yield credit. And we run a central limit order book for trading on-the-run Treasuries, where anyone can trade with anyone else, getting into the market that was previously exclusive through the interdealer brokers,” Schiffman says. “It’s going to take time to develop that with the buy side. But we think it has the potential to change the market.”

Direct to screen

Lee says that, aside from all-to-all, there are other innovative protocols gaining ground in rates markets. Lee himself was an early user of what he calls direct dealer connectivity (DDC).

Under a DDC model, a dealer connects directly to the execution management system of a client, disseminating streams, as well as axes and indications of interest (IoIs), right to the trader’s desktop. Execution can occur on that same stream of information, he adds.

Lee brought his own experience of trading with a DDC model—which he also described in detail on the WatersWavelength podcast—to his new role at TS Imagine, which now offers the functionality to click to trade on the streaming content. For the axes and IoIs, which are not a super-live indication and often include a negotiation, Lee says, TS Imagine allows the buy-side trader to click to engage, initiating a back-and-forth with the dealer. These capabilities are available for credit only at this point, but TS Imagine is bringing it to rates, probably in Q2 next year.

“We’re in the late stages of delivering it into production with three or four bulge-bracket dealers,” Lee says.

Whatever the innovation, it makes sense to review established ways of doing business, Lee says.

“There has been a marked increase in chatter in the rates world about deteriorating liquidity. It’s not a surprise to me that regulators are paying attention to that sort of marketplace griping,” he says.

“The people doing the griping are saying, we need changes, we need enhancements. The Treasury markets are highly electronic, in terms of the percentage of volume traded, but if liquidity conditions are starting to suffer among the tried-and-true protocols, it’s natural to assess current operating or market structure standards and wonder if there can be some improvement.”