Different actors in the Treasury market are facing different impacts from regulatory changes and the move to more electronic trading, said panelists at a Futures Industry Association conference in Chicago on Wednesday.
“Most sophisticated investors are comfortable with the changes that have been made on the asset side,” said Richard Mazzella, chief operating officer, global fixed income at Citadel Group, at the FIA's Futures & Options Expo. “But we haven't seen a similar evolution on the financing side,” where banks are getting away from providing such capital in the fixed-income markets because of regulatory restrictions.
“There's a slow regime change as the industry continues to de-lever and the market structure evolves,” Mr. Mazzella said. “I don't know if we're in the second or eighth inning of that change, but you hear about more banks getting out of the business, and that impacts even the highest-quality securities, which are Treasuries.”
Investors using order books have begun with smaller sized trades on electronic platforms, but the larger firms are exploring such trades. "Eventually, larger firms will learn to trade in an electronic environment," said Billy Hult, president of Tradeweb Markets, an electronic bond trading platform.
Mr. Mazzella said large money managers that trade in blocks have been slow to move to electronic trading “because they don't have the confidence to take on those trades electronically without having the expertise and the experience of using them. But many will begin to cross that line.”
Panelists agreed that regulations were the driving force behind the increase in volatility and liquidity in the Treasury markets, but there were those who praised the positive impact rules like the Dodd-Frank Wall Street Reform and Consumer Protection Act have had.
“Regulations have made the markets much safer,” said Isaac Chang, global head of fixed income at KCG Holdings, “but at the expense of less capital flowing into the system. How are we to invent more participants to bring in capital? Through more transparency and more access. Both of those are evolutionary changes.”
Another change inherent in market evolution is in price discovery, though “discovery itself hasn't changed,” Citadel's Mr. Mazzella said. “We look everywhere. Previously, fixed income traded entirely over the counter. How did we do price discovery then? Just like now — with a lot of detective work. We're doing the exact same thing today,” but because of the shift to electronic trading and other structural changes, “we have to do it a lot quicker.”
