Estes Seeks to Unlock Treasury Liquidity

Terry Flanagan

From challenge to opportunity.

That’s the highly condensed backstory of OpenDoor Trading, the U.S. Treasury-trading platform that launched this past April.

New rules promulgated in the wake of the 2008-2009 global financial crisis aimed to shore up the system and minimize the risk of recurrence. But there would be collateral damage to markets. For Treasuries, the Volcker rule in the U.S. and Basel liquidity ratios in Europe would diminish primary dealers’ capacity to warehouse risk, which would make it tough to find liquidity in off-the-run issues.

That’s how Susan Estes, who was assessing potential unintended consequences of regulation as executive advisor at MAP Alternative Asset Management, saw events unfolding.

Susan Estes, OpenDoor Trading

“We were ahead of the curve,” Estes said. “C-suite execs were running the same numbers as we were, but they were not communicating the results because they needed to manage personnel for downsizing. Heads of rates and desk heads were in denial.”

Estes co-founded OpenDoor along with Brian Meehan in September 2013. Over the subsequent three-and-a-half years, the executives assembled a team, developed and refined trading protocols, liaised with market participants, and built and tested technology. The firm went live on April 25, 2017, and matched its first trade on that same day.

From its launch through early September, Jersey City, New Jersey-based OpenDoor has received more than $130 billion in orders and matched multiple billions in trade, Estes said. It’s reasonable to say the firm has substantial upside, as it works on deepening liquidity impacting 98.5% of outstanding issuance in U.S. Treasuries, one of the world’s largest financial markets.

Executive Experience

The CEO of this fintech startup is no starry-eyed 20-something fresh out of business school. Estes has 35 years’ experience in fixed income markets spanning a variety of roles and responsibilities, making her deeply qualified to make sense of the rapid structural and technological changes shaping today’s markets.

Estes graduated from the University of Redlands near Los Angeles, as the first college graduate in her family. When she began her career as a runner at the Chicago Board of Trade in 1981, the yield on the benchmark 10-year Treasury note was close to 15% and 30-year Treasuries had debuted just four years earlier.

After joining Morgan Stanley in 1985 as one of the financial giant’s two women traders in capital markets, Estes rose through the ranks over the next 16 years, leaving the firm in 2001 as managing director and global head of U.S. Treasury and agency trading. “I found her to be a thoughtful market participant who was cool and decisive while operating in the cauldron of a Wall Street trading desk,” one former colleague recounted on her LinkedIn profile.

After a brief stint at Deutsche Bank, Estes joined Countrywide Securities in 2003, tasked with building a government primary dealership. In her role as head of non-mortgage rates trading, Estes expanded the business to include firm finance, U.S. agency debt, and U.S. derivatives/swaps, and she established a futures business.

In a May 2007 presentation to the Federal Reserve Board of Governors, Estes argued that the risk of subprime debt was substantially higher than was being perceived. Fearing a housing crisis, she sold her home in Los Angeles and began hedging some of the mortgage exposure of a Countrywide securities subsidiary. She resigned in September 2007 after the firm requested the hedge be reduced.

Estes moved on to found Arch Pacific in 2008, with the aim of creating a new primary dealer. Increased capital requirements for primary dealers scuttled that plan, and in 2011 she joined MAP to focus on special risk projects for MAP’s institutional client base. That led to the new venture, which Estes indicated will be a long-term build.

New Market Structure

“OpenDoor introduced a new market structure that transitioned a portion of the market from an incumbent risk-intermediary model to a riskless-principal model,” where buy side matches with buy side and sponsor-dealers settle trades but do not take risk, Estes said.

More than 75% of the trade orders routed to OpenDoor so far have been placed at or through the bid-ask midpoint. This is important, Estes said, because it creates measurable liquidity, unlike the central limit order book (CLOB) and request for quote (RFQ) incumbent trading models.

Wall Street institutions generally don’t move quickly in changing how they do business, and as such, five months after launch, OpenDoor is matching just under 5% of the available pool of off-the-run Treasuries.

“We anticipate the next level of liquidity to come from accounts who were waiting on proof of concept and volume,” Estes said. “Our ability to scale is tied to our ability to connect to a long list of ‘second movers’ waiting for connectivity” via their execution management system and order management system, she said. This has been slow as many EMS and OMS vendors are occupied trying to meet compliance deadlines for MiFID II, she added.

“Third-party EMS/OMS systems act very much like utilities,” Estes explained. “They control 100% of their clients’ pipeline of connectivity to new venues.”

OpenDoor is working with Charles River, and “we look forward to working with the other major third-party providers,” Estes said. “We are actively seeking a place in their queue, with substantial support from a variety of significant real-money accounts.”

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