Hedge Funds Entering Dealer Treasury Trading Systems
World Economy

Hedge Funds Entering Dealer Treasury Trading Systems

With their holdings of government bonds at record highs, hedge funds are making further inroads into the $12.9 trillion Treasury market by trading on platforms historically dominated by primary dealers, Bloomberg wrote.
Hedge funds are trading on ICAP Plc’s BrokerTec and Nasdaq OMX Group Inc.’s eSpeed, systems once reserved for dealers and more recently used by high-frequency trading firms, according to a report published Tuesday by Greenwich Associates, a consulting firm based in Stamford, Connecticut. Regional banks are also following suit.
A retreat by big banks from market-making activities has opened the door for new participants in the world’s deepest and most liquid bond market. The forays made by hedge funds show how electronic trading is altering the Treasury market as traditional dealers face regulatory constraints and have less capacity for risk-taking.
“The presence of any buy-side flow signals a change that would have seemed impossible 10 years ago,” Kevin McPartland, head of research for market structure and technology at Greenwich, wrote in the report.
Asset managers domiciled in the Caribbean, seen as a proxy for hedge funds, held $324.5 billion of U.S. government debt as of July 31, an all-time high, the most recent Treasury data show.
“With all the talk about liquidity, the availability of dealer balance sheets, all investors are exploring new avenues for their trading,” McPartland said in a telephone interview.

 Market Making
Less than half of primary dealers surveyed by Greenwich said they are actively making markets on inter-dealer platforms anymore. Among the 22 primary dealers that trade directly with the Federal Reserve, Treasury trading is now heavily concentrated within the top five, which control 60 percent of the volume done by U.S.-based Treasury investors, up from 44 percent in 2005.
In the past, hedge funds would work directly with bond dealers to trade their securities.
The trend toward investors trading directly with one another on such platforms “appears set to continue,” McPartland wrote, with one in five investors surveyed by Greenwich saying “they either have or plan to gain access” to these systems in the coming years. “Regulators believe it will limit reliance on the big banks,” he wrote.

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