Human traders are increasingly losing out to machines in the world's biggest bond market.
While investors traditionally negotiated prices for U.S. Treasuries by telephone, they're increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. A record 48 percent of trades in U.S. government debt have occurred on electronic platforms this year, up from 31 percent in 2012, according to a study released yesterday by research firm Greenwich Associates.
Bond managers are looking for more efficient ways to determine values in a US$12 trillion market, as banks use less of their own money to opportunistically buy and sell, giving them less of an edge when they pitch their brokerage services.
“Investment firms are much more focused on being able to prove they're getting good execution than ever before,” said Kevin McPartland, head of research for market structure and technology at Greenwich Associates. “In Treasuries, the market seems ripe for electronic trading.”
The trend is squeezing profits on Wall Street, where firms are already facing lower trading revenues in a sixth year of record Federal Reserve stimulus that's suppressing yields and volatility. (Bloomberg LP, the parent company of Bloomberg News, and Tradeweb Markets LLC are the dominant providers of electronic systems for Treasuries trading, according to the Greenwich Associates study.)
The biggest banks reduced their rates-trading balance sheets by almost one-third, or about US$200 billion, since the 2010 peak, Credit Suisse Group AG analysts Ira Jersey and William Marshall wrote in a May report.
While electronic trading systems may allow for faster price discovery, the trend may also may discourage some investors from selling bigger chunks of less-traded securities out of concern they may move prices against themselves.
“The problem with some electronic trading is it takes the market maker out of the equation,” Jersey said in a telephone interview. “Occasionally that'll make it tougher to trade certain securities.”
While the U.S. Treasury market has more than doubled in size since the end of 2007, trading has fallen 4 percent in the period through the end of last year.
Average daily trading has fallen to US$498.1 billion this year through August, compared with US$551.4 billion a day in the same period last year, according to data compiled by the Securities Industry and Financial Markets Association.
Fed Stimulus
There's less buying and selling in part because a large portion of the debt is owned by the Fed, which has expanded its balance sheet to $4.5 trillion from less than $1 trillion in September 2008 through three bond-buying programs.
All of that central bank stimulus has also made it harder for investors to find yield, increasing pressure on them to make sure they get the best deals. So bond buyers are turning to a greater number of dealers for their bets on Treasuries, relying on more than eight firms this year from about six dealers in 2009, Greenwich Associates data show.
As investors prepare for rising interest rates and more volatility in the Treasury market, they're trying to become more nimble. So far, that's meaning less business for human traders, and more for the computers.
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