Countries covered: United States
The US Treasury market has experienced substantial structural changes in the past several years, with technological innovations and improved governmental finances both having large impact on the marketplace. One of the most important innovations in the secondary market for fixed income securities has been the introduction of electronic trading systems onto the trading desks at dealer firms. Electronic trading has become an indispensable element of day-to-day business practices, and hardly a day goes by without a new initiative being announced by dealers, dot-coms, regulatory authorities, or some combination of the above. The impact has been particularly hard felt in the interdealer market for US Treasury securities as all of the major IDBs have established electronic trading platforms and several new entrants have been attracted to the market.
The key to success of any electronic IDB platform, however, will be the ability to attract liquidity. Those that are able to attract and sustain trading volume will be the systems that ultimately survive. TowerGroup believes that the IDB industry, and in particular the electronic-broker sector, will experience a period of consolidation in the next several years as systems that fail to attract sufficient pools of liquidity will merge with competitors, be abandoned, or remain simply as deminimus components of larger product lines. The volume of available business cannot support the number of systems currently in the marketplace, particularly given the great importance that market participants place on pools of liquidity. When the dust settles, only three or, at most, four systems can be expected to survive.
Additional Information
Highlights
The US Treasury securities market has undergone a structural shift in the past several years as declining volumes and changing investor patterns have forced established market players to employ new strategies to remain competitive and, more importantly, profitable in this new market environment.
Electronic trading will rapidly become the dominant method of execution of transactions in the dealer-to-dealer market for US Treasury securities as dealers increasingly turn to electronic systems to lower costs, increase efficiencies, and remain competitive in the new market structure. TowerGroup estimates that 44% of US Treasury transactions effected through interdealer brokers (IDBs) will be executed completely electronically by the end of 2000, with that rate rising to as much as 75% by the end of 2001.
Five interdealer brokers are currently vying to survive in the dealer-to-dealer US Treasury securities market. As competition for customers intensifies, electronic trading and differentiation of services will become crucial strategies. Consolidation and attrition are likely to leave just three dominant players standing.
It is only a matter of time before institutional investors have direct access to wholesale systems. They already have indirect access to wholesale prices and liquidity through private labeling of electronic interdealer platforms.
Institutional investors gaining access to the professional market raises the stakes in this battle as these firms will vie not only for the position of top dog in the IDB market but also for dominance of the future of electronic bond trading for all market segments.
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