Proprietary trading firms may be fueling tighter connections between tier-1 and regional dealers in the US Treasuries market as they take a growing share of the trading volume.
PTFs account for approximately one-fifth of the daily trading volume, or $140 billion, according to data from the US Department of the Treasury.
It is amongst this backdrop that fintech provider Broadway Technologies has seen slow but steady growth in direct connections between the tier-1 and regional dealers, according to Tyler Moeller, Broadway CEO.
“Some regional dealers have voiced their concerns regarding dealing with proprietary trading firms on the electronic Treasury market, which are a little overblown,” Ken Monahan, vice president, market structure and technology at Greenwich Associates, told Markets Media. “They feel more comfortable with having bi-lateral streams to three or four New York dealers from which they can pick the best price at any given time.”
The peer-to-peer connections between dealers and regional dealers provide dealers with access to more uncorrelated flow than they would find on the electronic trading venues, which is better for internalization and saves on trading costs, noted Moeller.
“The regionals’ order flow will be from regional bank clients that definitely are not toxic hedge funds,” added Monahan. “The retail banks cover the real money guys, which are great clients because they are not going to pick you off.”
On the other side of the equation, regional dealers “do not need to expand their balance sheets on assets where they are not going to make a lot of money but not tie up a whole bunch of capital,” said Moeller. “They do not have to hold inventory or things that will not be that profitable.”
As a result, regional dealers can maintain the size of their trading desks and could outsource some of the curve or some of the issuances that they do not want to internalize, he added. “However, you still want to offer it to your client by outsourcing that liquidity to a larger bank.”
Direct connectivity is still in its pioneering days, with Broadway Technology seeing demand from dealers as well as the regional dealers.
“They will be learning about how and where that is most effective, but I think it will be incremental,” said Moeller.
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