Tuesday, December 12, 2017 Stamford, CT USA — The U.S. Treasury market is known as one of the world’s most liquid and transparent markets. However, market participants and regulators alike are surprisingly in the dark about some of the market’s inner workings—especially when it comes to the rapid changes brought on by the advance of electronic trading.
“The lack of transparency into the mechanics of the U.S. Treasury market came to the attention of policy- and rule-makers after the flash rally of 2014,” says Kevin McPartland, Head of Greenwich Associates Market Structure and Technology Research. “Although that event lasted only an hour, and yields recovered fully by the end of trading, the fact that regulators could not determine exactly what caused the movement revealed our fundamental lack of understanding about some aspects of how the modern U.S. Treasury market functions.”
To create a clear and accurate picture of the full U.S. Treasury market, Greenwich Associates analyzed its own research, including interviews with more than 100 North American investors in U.S. Treasuries, top dealers and non-bank liquidity providers, and each of the eight electronic platforms used to trade these bonds with data from the Federal Reserve. The results of that analysis are presented in a new report, Sizing and Segmenting Trading in the U.S. Treasury Market.
The report finds that almost 70% of the $487 billion in U.S. Treasuries traded every day is executed electronically. That share includes 94% of trading volume in the wholesale market and, for the first time this year, more than half of trading volume in the much bigger market between dealers and clients.
Wholesale Market Concentration
Thirty-nine percent of overall U.S. Treasury volume is traded in the wholesale market, which equates to just shy of $190 billion a day. A large portion of the trading in these wholesale markets is at the hands of principal trading firms, which Greenwich Associates estimates are party to over 60% of notional volume daily (or about one-quarter of total market volume).
“We believe these high-volume market participants—despite the fact that most do not face investors directly or take long-term risk positions—have become systemically important,” says McPartland. “If one of the top three providers in this market suddenly stopped trading, the short-term liquidity vacuum would be noticeable, and market prices would almost surely react negatively.”