April 4, 2013 8:43 pm

Nasdaq sets stage for HFT in Treasuries

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Acquisition of eSpeed is key to expansion for the group

High frequency traders, the gunslingers of the trading world, could be about to make their presence more keenly felt in the world’s biggest government bond market.

Stock exchanges operator Nasdaq OMX has paved the way for an expansion of high-frequency trading in the US Treasury market by buying the eSpeed electronic bond trading platform from BGC Partners, a $750m deal announced late on Monday.

US government debt

US government debt
Debt growth against Treasury trading volumes

High-frequency traders have been accused of increasing volatility and instability in equity markets, to the detriment of other investors.

For Nasdaq, the deal represents a long-term investment in a core market dominated by eSpeed and Icap’s BrokerTec platform.

But the group is seen as needing to tread carefully, with the Wall Street dealers that dominate the Treasury market wary of it being opened up to more players that could hurt their bottom line.

While Treasury trading on eSpeed and BrokerTec has long attracted hedge funds and other firms that use high-frequency trading strategies, the entry of Nasdaq could pave the way for more of these operators.

Bob Greifeld, Nasdaq chief executive, was quick to highlight the similarities between the exchange’s equities business and US Treasuries. “Both are highly efficient electronic marketplaces.”

Under the deal, benchmarks of six of the most liquid US Treasury notes and bonds, including the two-, five-, 10-, and 30-year bonds and notes, known as “on-the-run securities”, will be traded on Nasdaq.

“Having the [eSpeed] in Nasdaq’s control at a minimum means they will move it closer to the exchange’s core constituency and will only accelerate any growth of HFT in the market,” says Jamie Selway, head of liquidity management at ITG.

Others doubt that the sort of sudden, sharp price movements seen daily in equities would happen in US Treasuries as the market is not as fragmented as share trading.

They point out that algorithmic trading and high-speed trading has been part of the Treasury environment for some time. While no firm data are available, consultants estimate that high-frequency traders make up some 35 per cent of the market.

Nasdaq could also look to increase volumes by offering direct access to the US Treasury market to large asset managers, encroaching on territory traditionally the domain of large banks. But such a move could antagonise dealers, who play a crucial role as they underwrite Treasury debt sales and prefer to trade directly with their clients and then separately with rival dealers.

The head of fixed income trading at a large electronic trading company says BGC, former owner of eSpeed, had been cautious in approaching the asset managers since it relies on volumes from big financial institutions. “Nasdaq in the short term risks angering large banks,” he says.

Traders also say Nasdaq’s move is a long-term bet on a pick-up in Treasury trading once the Federal Reserve’s quantitative easing slows. More than $500bn in US Treasuries are traded daily and electronic trading accounts for 40 per cent of that, a number Nasdaq believes will increase.

Nor is Nasdaq likely to stop at Treasuries. The group is planning geographical expansion, with new markets such as gilts, Japanese government bonds, repos and European sovereigns under consideration, people familiar with the situation have said.

In a Treasury market dominated by just two electronic venues, Nasdaq has already ruffled relations with ICAP, as the latter’s BrokerTec platform is supported by Nasdaq trading technology.

Nasdaq says it will not be replacing the eSpeed technology, in part as its flexibility will allow the exchange to add new contracts and new markets at short notice.

The head of electronic trading at a major primary dealer in New York says it still plans to trade on eSpeed under its new ownership and he expects little change in the near term.

“We plan to be very engaged when Nasdaq proposes new ideas about trading in this space,” he says.

Reporting by Philip Stafford, Arash Massoudi and Michael Mackenzie

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