By Alastair Hawker, Quantitative Brokers (QB)

The importance of the US Government Bond market cannot be overstated. As the Federal Reserve itself has ​described​: “It is widely regarded as the deepest and most liquid securities market in the world, playing a critical role in the global economy and in the Federal Reserve’s implementation of monetary policy.”

Then surely trading for this market is the most technologically advanced, transparent and accessible of all securities markets in the world? Well actually it hasn’t been but it is slowly changing. Advanced trading technology that is accessible to all participants is helping to create a fairer, more transparent market. Although it is still nascent, which is in a way surprising given how “electronic” the market is already. (64% of total U.S Treasury trading volume in July 2019 was executed electronically – Source: Greenwich Associates). Such technological advances can only be a good thing given the importance of a high functioning secondary market for the management of the US national debt.

Often labeled as the “Cash Treasury” or “UST” market, around half a trillion dollars turns over daily. By “cash” we mean not derivatives of it such as futures (i.e. we are discussing the actual bonds), but if you do include the CME Treasury futures complex the total notional turned over daily often approaches one trillion dollars. In the UST market, roughly half of the volume is “inter-dealer”, an out of date label that denotes trading between non buy-side firms (end investors). The other half are trades that involve the participation of the buy-side. Liquidity access has been heavily bifurcated along these lines.

There are a multitude of ways of executing USTs: Voice Requests For Quotes (RFQs), Electronic RFQs, Central Limit Order Books (CLOBs) and Bi-Lateral Pricing Streams.

We believe that the last year has been pivotal for the evolution of the UST market which will increasingly blur the lines of division between the inter-dealer and buy-side areas:

  • November 11, 2018​: CME Group closes its acquisition of Nex Group. There can be no doubt about the strategic importance of the largest UST CLOB, Brokertec, to the world’s largest operator of futures CLOBs.
  • August 13, 2019​: MarketAxess announces its acquisition of LiquidityEdge. Their growth since launch in 2015 indicates the appetite for bi-lateral pricing streams and the need for liquidity aggregation.
  • The relative newcomer ​Fenics UST​ continues to grow. In barely 2 years its volumes have grown to $17bn per day with an 8% share of the CLOB market. This demonstrates the importance of CLOBs and the capacity of the market to accommodate competitive and innovative new solutions.

Generally, Wall Street isn’t good at change unless regulators force it. Resistance to change can be substantial, caused by years of precedent, inertia and decision making fear. Technological

change has come to the buy-side UST market, but it has mostly been through electronification of existing processes, i.e. Request For Quotes (RFQs) moving from voice to the electronic platforms Tradeweb and Bloomberg. Where we expect big changes in the years to come is significantly more buy-side access to the other types of electronic trading, CLOBs and Bi-Lateral Pricing Streams.

TRACE reporting for UST has introduced some transparency that didn’t previously exist. However, it is more for historical purposes and only available to regulators other than for a few snippets that have been made public. We believe there is still a long way to go: The UST market needs an aggregated, real-time, public, “consolidated tape”, similar to US equity markets. This would enable the same level of transparency that already exists in CME Treasury futures. However, in the absence of such transparency, the only other option is to build as much of a comprehensive picture of liquidity as possible using all available means. Fortunately technology makes this possible, although it is not just seeing the market but being able to participate in all parts of it that is also important for the buy-side.

As Kevin McPartland from Greenwich Associates commented in a ​recent blog​, “The CLOB market continues to serve as the benchmark price for the entire market”. As the largest segment of the multiple ways to trade cash treasuries (40.8% of the market), quite simply why would anyone not want to access it? CLOBs provide a huge swath of liquidity, price discovery, ability to provide liquidity, and the benefits of anonymity. The efficiency of futures markets perfectly demonstrate this. For those that do not currently access CLOBs it is a huge void. In fact, transparency and access to a CLOB for all users seems to have driven Fenics UST’s surprising ascent.

Furthermore, this does not have to be a choice of choosing one over the other. You can have it all. Continuous bi-lateral pricing streams from direct liquidity providers can be aggregated with the CLOBs to combine the best of both worlds. Greenwich Associates reports that use of pricing streams is growing; “accounting for 7.6% of volume in May 2019 up from virtually zero only 5 years ago”. Aggregating CLOBs and pricing streams is quite a contrast from the RFQ process, where you choose a few dealers and hope for the best.

As electronic trading expands across multiple venues, providers and methods, the need for aggregating liquidity is even greater. If this aggregation is done well, it can provide the best possible view of the market, a significant improvement over any individual source or method. Going forward we expect the increasing diversity of execution choices will apply to some of the off-the-runs too, not just the on-the-runs where electronic trading has been the most prevalent. At QB, we have just launched the 2nd generation of our UST Smart Order Router (SOR). We believe our intelligent algorithmic execution and advanced liquidity aggregation are groundbreaking innovations for the US cash treasury market. A hidden treasure for UST traders, with benefits awaiting those open to trying something new.

Alastair Hawker is the Head of Sales for QB. He can be reached at

Quantitative Brokers, an independent, global financial technology company, provides advanced algorithms and data-driven analytics to clients in the Futures and US Cash Treasury markets. The company is built on a research driven culture, market microstructure know-how, and algorithmic engineering expertise. QB continually develops and innovates an evolving suite of products to reduce implicit trading costs for its clients. Headquartered in midtown Manhattan, QB has offices in London, Chennai, and Sydney.