Human traders are increasingly losing out to machines in theworld's biggest bond market.

While investors traditionally negotiated prices for U.S.Treasuries by telephone, they're increasingly turning to computer-basedmarketplaces for a range of price quotes from different dealers. Arecord 48 percent of trades in U.S. government debt have occurredon electronic platforms this year, up from 31 percent in 2012,according to a study released yesterday by research firm GreenwichAssociates.

Bond managers are looking for more efficient ways to determinevalues in a US$12 trillion market, as banks use less of their ownmoney to opportunistically buy and sell, giving them less of anedge when they pitch their brokerage services.

“Investment firms are much more focused on being able to provethey're getting good execution than ever before,” said KevinMcPartland, head of research for market structure and technology atGreenwich Associates. “In Treasuries, the market seems ripe forelectronic trading.”

The trend is squeezing profits on Wall Street, where firms arealready facing lower trading revenues in a sixth year of recordFederal Reserve stimulus that's suppressing yields and volatility.(Bloomberg LP, the parent company of Bloomberg News, and TradewebMarkets LLC are the dominant providers of electronic systems forTreasuries trading, according to the Greenwich Associatesstudy.)

The biggest banks reduced their rates-trading balance sheets byalmost one-third, or about US$200 billion, since the 2010 peak,Credit Suisse Group AG analysts Ira Jersey and William Marshallwrote in a May report.

While electronic trading systems may allow for faster pricediscovery, the trend may also may discourage some investors fromselling bigger chunks of less-traded securities out of concern theymay move prices against themselves.

“The problem with some electronic trading is it takes the marketmaker out of the equation,” Jersey said in a telephone interview.“Occasionally that'll make it tougher to trade certainsecurities.”

While the U.S. Treasury market has more than doubled in sizesince the end of 2007, trading has fallen 4 percent in the periodthrough the end of last year.

Average daily trading has fallen to US$498.1 billion this yearthrough August, compared with US$551.4 billion a day in the sameperiod last year, according to data compiled by the SecuritiesIndustry and Financial Markets Association.

Fed Stimulus

There's less buying and selling in part because a large portionof the debt is owned by the Fed, which has expanded its balancesheet to $4.5 trillion from less than $1 trillion in September 2008through three bond-buying programs.

All of that central bank stimulus has also made it harder forinvestors to find yield, increasing pressure on them to make surethey get the best deals. So bond buyers are turning to a greaternumber of dealers for their bets on Treasuries, relying on morethan eight firms this year from about six dealers in 2009,Greenwich Associates data show.

As investors prepare for rising interest rates and morevolatility in the Treasury market, they're trying to become morenimble. So far, that's meaning less business for human traders, andmore for the computers.

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