Trading in the $12.7 trillion U.S. Treasuries market, once thedomain of Wall Street's biggest banks, is increasingly dominated byfirms most people have never heard of.

Determining which ones is largely guesswork, however, which ispeculiar in this market—the deepest, most liquid market in theworld, which sets the benchmark rates for everything from mortgagesto corporate debt. The unwelcome secrecy is also a little strangeconsidering how much more transparent the world's largest bankshave become.

This week, Risk.net published a list it obtained ranking the topinterdealer traders of Treasuries. It showed three Chicago-basedfirms, Jump Trading, Citadel Securities, and Teza Technologies,accounting for 51 percent of the volume executed by the top 10firms on BrokerTec, a popular electronic debt-trading platform.

Icap Plc, which owns the BrokerTec system, disputed the numbersbut declined to disclose alternative ones. Regardless of theprecise distribution of trading, the shift is clear. Many of thedealers listed are high-frequency traders or firms that rely oncomputer algorithms to arbitrage small differences in Treasuryprices.

That isn't necessarily bad. In many cases, these traders arefilling a void left by Wall Street banks, which have shrunk theirU.S. government bond trading desks in the face of new regulationsand less-predictable profits. But it's difficult to evaluate theactions of firms that operate largely in the shadows, hard toobserve by competitors and regulators. And it increases the riskthat a market-rattling hazard could erupt from seeminglynowhere.

This may help explain why regulators spent months examining what happened last Oct. 15,when yields on 10-year Treasuries plunged suddenly and somewhatrandomly, roiling related markets and causing some dealers tostop trading entirely before yields quickly rebounded. There wasn'ta clear catalyst for the turmoil, which raised questions about themarket's stability. Regulators came up with the rather inconclusiveconclusion that changes in market structure could lead to “rare butsevere bouts of volatility.”

The influence of high-frequency traders in the Treasury marketis clearly growing. That is alarming to some, perhaps needlessly.The automation could potentially provide a key service to marketsthat are being abandoned by bigger dealers.

But as with any evolution, that development comes withunexpected consequences. It would be easier to parse out the goodguys from the bad if there was better surveillance over who's doingwhat in this crucial market.

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