RMJ's McKAY: Wider Access To Treasury Prices Coming Soon

A panel discussion of "Expanded Access to Interdealer Broker Prices" featuring Peter McKay, chairman of RMJ Securities Corp, yielded several cryptic comments on the future structure of the U.S. government securities market.

The last-minute withdrawal from the panel of William R. Araskog, vice president in charge of trading government securities at Lazard Freres & Co., was due to the "sensitive political nature of the issues," according to a spokesperson for conference organizers Institute for International Research Inc.

Brandon Becker, associate director, division of market regulation at the Securities and Exchange Commission; Paul Cooper, president, Knight Ridder Financial Services Division; and Gregory Gorup, manager of U.S. government securities at Reuters Information Services Inc.; also participated in the workshop.

RMJ, along with two other major interdealer brokers, is now working with the Justice Department, according to McKay, to develop a "legitimate" structure for a proposed interdealer broker price reporting entity. The three major brokers got together for defensive reasons, says McKay, because "if any one of us attempted to provide information without the concurrence of the dealers, they would cut us off and go to our competitors."

Three out of six isn't enough to eliminate competition, but McKay suggested there would soon be one less interdealer broker. He declined to elaborate.

Despite Becker's prediction that it will take a "direct push" to get the interdealer brokers to allow wider access to their information franchise, McKay asserted that, "you will have that information, and access to the market, much quicker than you dreamed."

But the expanded price access envisioned by McKay apparently doesn't include unlimited distribution to the retail market. Instead, he sees an increase in the number of dealers with access to the inside market. RMJ is "attempting to position itself to handle a larger customer base," says McKay.

A spokesman for the Federal Reserve Bank of New York declined to comment on whether the Fed plans any substantial increase in the number of reporting dealers.

Primary dealers, resigned to wider distribution of their inside prices, are re-evaluating the risks and benefits of providing liquidity to the U.S. government. "They take the fundamental position that the business isn't worth it anymore," says McKay.

"You folks are going to have to step up to the plate and assume that risk," he says.

Membership has its price as well as its privileges. McKay suggested that interdealer broker price information will only be available to firms willing to accept the responsibilities of market-making, and follow a few "simple but onerous rules," one of which is dealing with the Fed.

"You will not accept this information and analyze it to death but not take action," says McKay, "you will make markets, you will trade even when you are losing money."

Mckay accused the top tier of institutional investors of being afraid to act as dealers. He asserted that plan sponsors, pension funds and mututal funds only want access to inside prices "so they can pick off the dealers."

So while McKay says that access to interdealer broker prices will be expanded, he also suggests that inside price information will remain limited to an unspecified class of Treasury security dealers.

Nor will the information be given away. RMJ and the other interdealer brokers involved in the Newco consortium reportedly plan to impose an "exchange fee"-type payment schedule for all screens outside the inner circle carrying the new Treasury price feed.

Meanwhile, secondary market participants have a "critical need" for more accurate, timely, and comprehensive market data for Treasury securitites, and vendors aim to satisfy that need. The data is needed, according to Becker:

Because publicly available sources of information on the primary market are substantially inaccurate;

So that customers can effectively police the quality of the executions they get from their dealers;

To broaden participation in the market; and

To satisfy analytical requirements.

The franchise for expanded price distribution will be "bid out to the vendors," says McKay. Both vendors on the panel had some ideas about what to do with it.

Subtly angling for the adoption of a multiple-vendor distribution scheme, Cooper of Knight Ridder suggested that customers could expect competition to yield better, more economical information services.

Cooper displayed a "money flow" analytical screen which he attributed to Lazslo Birinyi, director of sales at Salomon Brothers. Money flow analysis, according to Cooper, requires accurate up-and down-tick volume information, and allows users to spot divergences between price and the money flowing into or out of an instrument.

"Unless you're trading baseball cards," says Gorup of Reuters, "you need accurate information about this market." Reuters has already put some templates together, he says, to present information on block trades, volume, and yield-to-maturity on bids and offers. Reuter's vision for a Treasury securities information product -- most likely the Reuter Dealer Trading System -- is a single screen with windows for prices, news, fundamental and technical analysis, as well as charts and graphs, says Gorup.