Outlook 2019: Michael Paulus, OpenDoor Securities
Michael Paulus is managing director and chief compliance officer at OpenDoor Securities.
What is the next watershed moment for the industry?
The publication of US Treasury data, i.e., TRACE data, will be a significant development that will have a lasting impact on the Treasury market. TRACE reporting data for US Treasuries, which began in July 2017, is currently only available to the regulators. The publication of the data will provide greater transparency which will increase the confidence of both investors and traders in the US Treasury market.
The key will be how much data to release and when. The release of TRACE data without appropriate time lags actually could negatively impact market liquidity and confidence if investors and traders feel it hurts their ability to execute trades or undermined confidentially.
What was the most important lesson of 2018?
Two vital lessons defined 2018. First, we learned that collaboration between banks and fintech vendors is alive and well. Large institutions are making significant investments in technology startups around the world. Financial institutions are recognizing the potential that exists in partnering with these firms rather than spending more to construct their internal systems or spending large amounts of cash to update outdated technology.
The second is the value of data. The use of data is being examined very closely by both the buy- and sell-sides and, more recently, regulators. Transparency around data has had a significant impact on credit markets in recent years. Expect the same in US Treasuries if transparency is heightened around trade data.
Which market structure changes should take place in 2019?
It would be the broader adoption of all-to-all trading models. Market structure is continually evolving and transparency, as stated above, is one of the driving forces. Increased visibility and the ability to trade with significantly more counterparties naturally increases liquidity in the market, particularly in the two areas OpenDoor has established itself, in off-the-run US Treasuries and TIPS. These are the two biggest pain points in the Treasury market and yet two of the largest and most important, particularly in light of the US government’s funding requirements over the next decade. As a result, the buy side is looking to play an increasing role as price makers. Nevertheless, it’s hard to envision a future where the dealers do not continue to play a critical role. Wider adoption of all-to-all platforms in 2019 only makes sense, especially with the traction these models are seeing in other markets.
Less liquidity makes TCA a critical tool.
Data is harder to come by in the less liquid, off-the-run Treasury securities.
Aim is to provide the buy side with liquidity across asset classes on a single venue, in a single trade.
Market shifts away from submission-based pricing, toward independently validated reference prices.
Products enable fixed income and FX traders to manage execution costs and portfolio construction.