Shaping the future of US Treasuries trading

Tradeweb Markets’ Thomas Pluta and Bhas Nalabothula, and Maile Robichaud from State Street Global Advisors discuss the evolution of US Treasuries trading and the innovations that are shaping its future

• Thomas Pluta, President, Tradeweb Markets
• Bhas Nalabothula, Head of US institutional rates, Tradeweb Markets
• Maile Robichaud, Head of fixed income trading, Americas, State Street Global Advisors

As a trusted global benchmark for interest rates, an established safe-haven asset and a recognised source of liquidity for institutional investors, the US Treasuries market is a cornerstone of the financial system. It was, therefore, a natural starting point for the launch of Tradeweb’s electronic request-for-quote (RFQ) trading marketplace some 25 years ago.

To what extent has Tradeweb’s marketplace for electronic RFQ US Treasuries trading met expectations?

Thomas Pluta, Tradeweb Markets

Thomas Pluta, Tradeweb Markets: US Treasuries is where it all began for Tradeweb. In the early days of electronic trading, when Tradeweb was ultimately trying to change market structure and behaviour, resistance was inevitable.  However, the progress made in the past 25 years has exceeded all expectations. It has been an incredible journey for Tradeweb, one that hasn’t been limited to just Treasuries, but also across rates, credit and equity products. Tradeweb’s share of the Treasuries market is now around 20% across all protocols, and it boasts the biggest share of any electronic trading platform. Our ongoing innovation and collaboration with clients, aimed at developing and refining protocols over time, has fuelled this growth and adoption.

Bhas Nalabothula, Tradeweb Markets: The innovations, spurred by the move to electronic trading in the Treasuries market 25 years ago, have had a lasting impact on trading across multiple asset classes, including derivatives, credit and mortgages. The move to electronic trading of interest rate swaps on regulated venues worldwide following the Dodd–Frank Wall Street Reform and Consumer Protection Act, and the second Markets in Financial Instruments Directive, known as Mifid II, was only possible due to the protocols created originally in US Treasuries. Tradeweb’s presence in the Treasuries market has also greatly expanded from its initial days of being focused on the institutional dealer-to-client market, to now include the wholesale and retail markets.

The US Treasuries market led the bond market into electronic trading. Where do you expect the next wave of innovation to come from?

Maile Robichaud, State Street Global Advisors: In some ways, the US Treasuries market can be looked at as a predictor of innovation in other sectors of the bond market. For example, ‘portfolio trades’ in US Treasury funds were being executed 15 or more years ago. This trading protocol, having originated in the US Treasuries market, subsequently evolved and found its way into the credit markets. This transformation unfolded over many years, influenced by advancements in the underlying data and the proliferation of fixed income exchange-traded funds. The next wave of innovation is expected to manifest through incremental improvements and the evolution of individual fixed income sectors. This trajectory aligns with the dynamic changes present in the regulatory landscape.

Thomas Pluta: Being the most electronified, deep and liquid market, Treasuries often take the lead on innovations that we will subsequently introduce to other markets. We believe the next wave will most likely be across areas that are not yet electronified, which account for approximately one-third of the market. This includes block-size or larger trades, as well as less liquid parts of the market, such as deeper off-the-runs, Treasury inflation-protected securities and separate trading of registered interest and principal securities.

It’s important to us that our platform is fully tailored to traders’ needs, objectives and patterns, and we are therefore focused on innovating in cross-product, multi-leg trades – which, historically, have been managed by voice desks – to connect across the various rates products. Additionally, handling larger trades presents an opportunity because we are allowing clients to break down large trades and execute them over a preferred period, enhancing flexibility and efficiency.

Bhas Nalabothula, Tradeweb Markets

Bhas Nalabothula: In the dealer-to-client space, there has been a move to include firm streaming liquidity across the curve to complement RFQ liquidity – a trend we expect to continue. We’re also developing protocols for less liquid sectors of the market. For example, the session-based protocols under our Sweep brand in the interdealer market have been successful. This allows dealers to enter buys and sells anonymously at discrete points during the day and match with other liquidity providers. That has been a very effective way for the sell side to efficiently manage inventory and balance sheets.

How will shifts in the Treasuries market reshape trading over the next five years? What trends are you seeing?

Maile Robichaud: Shifts in the Treasuries market will have broader market implications over the next five years. Currently, the market is focusing on the end of a rate-rising cycle and the Securities and Exchange Commission’s (SEC’s) approval of the final rule for centrally clearing Treasuries. This stabilisation in the rate cycle has already led to higher secondary volumes. However, the full impact of the clearing mandate’s approval on the markets remains uncertain because of various unknown factors. In addition, there is a need to closely examine how this rule will interact with other regulatory measures.

Bhas Nalabothula: The regulatory framework put in place, alongside the SEC final rule on clearing for treasuries and repo, and its impact on trading, will be a catalyst for change and innovation in the market. Clearing mandates in the swaps market and the standardisation and efficiencies that come with it, spurred further e-trading – an impact we also expect to see in treasuries and repo.

What other trends do you expect to see in the market?

Maile Robichaud, State Street Global Advisors

Maile Robichaud: I would expect to see innovative approaches, including the convergence of liquidity pools through electronic connectivity networks. This evolution will empower the buy side, enabling it to efficiently ‘match off’ risk with other similar market participants before exploring alternative avenues of liquidity. Another protocol that could gain traction is the emergence of the buy side as a liquidity provider in Treasuries markets. This involves pricing risk through the same electronic connectivity networks.

Liquidity is a key challenge for market participants. To what extent are pools of liquidity becoming more connected? And what does that mean for market structure?

Thomas Pluta: The liquidity providers participating in the US Treasuries landscape have evolved significantly over the past 10 years. Primary dealers are still the backbone of the core liquidity in the Treasuries market, but there are other providers that come from a different type of trading style, providing significant liquidity in on-the-run and futures markets. These providers contribute critical components to the current liquidity landscape. We've seen new entrants in the traditional dealer-to-customer markets on our institutional platform, as well as in the principal trading firm space within our active wholesale business.

As the market has evolved, we now observe the emergence of interconnected pools of liquidity. This can involve trading on a disclosed basis or by using an anonymous-based protocol resembling an order book that can either be disclosed or anonymous. But, in all cases, it involves aggregating the market liquidity available to clients, giving them the chance to direct their trades for the best possible outcome in terms of execution quality. One of Tradeweb’s advantages lies in our comprehensive position across the institutional, wholesale and retail space, which helps to service our diverse range of clients with varied market-trading requirements.

How are clients using automation in their trading strategies now? How is this likely to develop in the future?

Maile Robichaud: Automation will continue to evolve in fixed income markets across the liquidity spectrum. The current trend involves automating low-touch strategies, which, in turn, releases capacity for increased utilisation of high-touch strategies. This progression is becoming ingrained within the market ecosystem, paving the way for a higher percentage of trading activity to be conducted through automated means.

Bhas Nalabothula: Clients are engaging with automation in various ways, depending on their level of comfort. Some are using Tradeweb's Automated Intelligent Execution (AiEX) protocol to automate their lower-touch trades, while others trade on a fully automated basis. Since its launch in 2012, we have evolved AiEX to give clients more control over how and when they trade, as well as who to trade with. Through the rules-based tool, clients can select dealers that may offer a better price on a certain security, based on their historical trading record. Currently, around 50% of our Treasury tickets – around 10–15% of our volumes – are executed via AiEX.

What is the next technological innovation you are focusing on?

Maile Robichaud: Our current technological focus revolves around the entire lifecycle of a trade, with an emphasis on capturing all relevant data points associated with each transaction. This strategic approach aims to leverage these data points and improve pre-trade decision-making, while providing additional inputs for automation. The next phase of this technological evolution involves incorporating these data elements into the portfolio construction process. By pushing this information upstream, we aim to maximise the certainty of execution at the lowest possible cost.

Thomas Pluta: Clients are very interested in continuing to push the boundaries of how they can access liquidity in the Treasuries market. We believe this will happen by combining the power of data with the execution tools we provide, allowing clients to bring new strategies to the table and use that data to inform their trading decisions. Additionally, we expect the use and adoption of automation to increase, with clients moving towards fully automated trading workflows.

Further details

Treasuries trading at Tradeweb

Sponsored content