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

Determining which ones is largely guesswork, however, which is peculiar in this market—the deepest, most liquid market in the world, which sets the benchmark rates for everything from mortgages to corporate debt. The unwelcome secrecy is also a little strange considering how much more transparent the world's largest banks have become.

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

Icap Plc, which owns the BrokerTec system, disputed the numbers but declined to disclose alternative ones. Regardless of the precise distribution of trading, the shift is clear. Many of the dealers listed are high-frequency traders or firms that rely on computer algorithms to arbitrage small differences in Treasury prices.

That isn't necessarily bad. In many cases, these traders are filling a void left by Wall Street banks, which have shrunk their U.S. government bond trading desks in the face of new regulations and less-predictable profits. But it's difficult to evaluate the actions of firms that operate largely in the shadows, hard to observe by competitors and regulators. And it increases the risk that a market-rattling hazard could erupt from seemingly nowhere.

This may help explain why regulators spent months examining what happened last Oct. 15, when yields on 10-year Treasuries plunged suddenly and somewhat randomly, roiling related markets and causing some dealers to stop trading entirely before yields quickly rebounded. There wasn't a clear catalyst for the turmoil, which raised questions about the market's stability. Regulators came up with the rather inconclusive conclusion that changes in market structure could lead to “rare but severe bouts of volatility.”

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

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

Instant Insights /

Treasuries Trading Ducks into the Shadows

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