US Treasury Market Evolves with Wholesale Venues, Bilateral Pricing and EMSs

All eyes are on the $28.6 trillion US Treasury market, which is undergoing transformation as the buy side wants access to new protocols and tighter pricing from dealers. 

For decades, US rates trading has been split between the dealer-to-dealer (D2D) pools, in which dealers trade with one another, and the dealer-to-customer (D2C) pools, in which dealers trade with the buy side.  Although the D2D markets have opened to hedge funds and asset managers, most buy-side firms do not access the interdealer markets or the protocols that are available to them.  

The rise of non-bank liquidity providers, innovative trading venues, and single-dealer application programming interfaces (APIs) streaming prices directly into execution management systems (EMSs) has changed the status quo. 

This shift is also occurring alongside the electronification of the US rates market and the demand for automation and efficient execution within the buy side’s workflow.  

Electronic trading in US Treasuries has ranged between two-thirds and three quarters of the overall volume.  However, in April, e-trading in rates fell 5% year-over-year to 54% of the market as traders flocked to voice trading amid the market turmoil, reported The Desk. This occurred when Treasury volumes surged to $1.34 trillion in average daily volume in response to tariff shocks 

Even so, there has been rising competition and record volumes on nearly all the electronic platforms, with newer entrants such as Fenics and MarketAxess emerging as major competitors to the incumbents. 

As the buy side looks to automate more of its orders, Daniel O’Connell, Vice President, Buy Side & Rates Sales, at FlexTrade, said: “There is increasing demand for interdealer platforms such as MarketAxess, Fenics, Brokertec and Dealerweb (Tradeweb subsidiary) for clients to trade using an order book, or dark pools with anonymous-customizable bilateral streaming.”  

With the buy side gaining access to these new marketplaces, the lines are beginning to blur between the separate D2D pools and the D2C pools. . 

To understand the magnitude of this change, it’s important to examine the history of the bifurcation and why US rates trading evolved as an over-the-counter market, organized around dealers interacting with other dealers and networks of clients. 

History of D2D vs. D2C Markets: CLOBs and RFQs  

In the late 1990s, Cantor Fitzgerald, an interdealer broker, developed a central limit order book (CLOB) called ESpeed, setting off the e-trading revolution. Then rival dealers formed a consortium known as Brokertec, to compete with ESpeed’s dominant market share. CLOBs anonymously matched trades, though dealers and market makers could elect to be disclosed or non-disclosed to their counterparties. 

In 1996, Tradeweb launched the first electronic dealer-to-customer marketplace, connecting institutions to many dealers. Through their traditional buy-side/sell-side relationships, institutions began to use the request for quote (RFQ) protocol on Tradeweb (and then Bloomberg) to interact with one or many dealers. 

PTFs Enter D2D Pools with Streaming 

Another major turning point in rates trading came in the early 2000s with the proliferation of principal trading firms (PTFs), such as Citadel, DRW, Teza Technologies and Jump Trading providing streaming liquidity into D2D pools such as Brokertec, reported The Desk. 

After the financial crisis of 2008, when stricter regulations caused constraints on bank balance sheets, PTFs became electronic liquidity providers in the IDB platforms. Though they did not have traditional buy-side/sell-side relationships, PTFs were known for their speed and automated trading strategies. 

According to a Fed Notes article, PTFs accounted for 61% electronic/automated volume on interdealer brokerage platforms in 2019, while primary dealers and other dealers had 38% and the buy side had an estimated 1%. 

Then dealers introduced their own single-dealer platforms with streaming prices, but the buy-side needed the technological resources to integrate with each SDP. 

RFQ and IDB Markets Evolve 

Meanwhile, the RFQ (D2C) and interdealer (D2D) markets developed their own functionality and protocols. Increasingly, the buy side grew more comfortable with the RFQ markets, which allowed them to interact with one-to-three or up to five dealers, providing an audit trail to prove best execution. 

Eventually, RFQ markets became more automated and sophisticated, with new protocols such as automated RFQ, while the CLOBs appeared to be less suitable for off-the-run issues. 

At the same time, dealer markets evolved independently, with smart order routing, algos and different tick increments.  

New IDB Venues with Bilateral Streaming 

Over the past decade, as technology continues to advance, a new breed of IDB venues emerged including Dealerweb from Tradeweb, Fenics from BGC Group, and Liquidity Edge, acquired by MarketAxess.  

New wholesale venues begin to challenge the two-tier model, offering the buy side different ways to interact with their rates liquidity. 

• IDB venues began to offer bilateral streaming into customized order books.  

• Banks introduced a sponsored-access model providing streaming prices via their SDPs.  

• The buy side gained access to streaming rates based on their relationship with an executing bank or broker.   

As a next step, brokers introduced their own liquidity APIs with direct streaming into EMSs. According to FlexTrade’s Dan O’Connell, dealers began to offer customized streams to the buy side via FlexTrade’s EMS with ‘firm prices,’ which take priority over the indicative prices that the buy side receives in RFQ venues.  

Today’s Rates Market Structure 

Liquidity continues to be split between the wholesale and D2C markets, though both segments are interconnected through dealers updating their prices via the same algorithms across both segments. 

A series of strategic mergers and acquisitions with interdealer venues changing hands has resulted in the consolidation of D2C and D2D pools on a few established platforms – including BGC Partners, CME Group, MarketAxess and Tradeweb. 

There are also signs that rates markets could further converge through the ability of EMSs to aggregate streaming liquidity, while providing centralized access to the various D2D and D2C venues.   

To dive deeper into the storied history, specific protocols and technology advances in Treasury trading and where the market structure is headed: click here to read FlexTrade’s whitepaper: “The Evolving Role of the EMS and Bilateral Streaming in US Rates Trading.”