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Founder here. I find it crazy that over 50% of transactions in Treasuries and 70-90% in other asset classes are still traded over the phone. Lots of room for n

Founder here. I find it crazy that over 50% of transactions in Treasuries and 70-90% in other asset classes are still traded over the phone. Lots of room for new entrants to make an impact in the space.

Dwolb 12y ago
There's a big opportunity to put people's bid/ask on a single platform, but it's always tough to build a two-sided market. Are you concentrating on building supply or demand first? What's in it for the incumbents to use this platform? Doesn't the status quo benefit them? (I'm guessing less price transparency and less liquidity in the market translates to higher fees and margins)
- jim_greco 12y ago
  The biggest change since the financial crisis is that the buy-side (mutual funds, hedge funds, pensions) is now in the driving seat for determining what the future of markets look like. We're seeing that with innovative new exchanges like IEX in the equities space. We've built demand on the buy-side and are now reaching out to sell-side partners who are interested in moving the market forward. The parts of the sell-side that haven't invested in technology and are holding onto their old ways aren't very excited. The parts that have are a lot more open and we are looking forward to having them onboard on day one.
  - Dwolb 12y ago
    Ah great move. Capturing the scarce side of the market usually works unless there's some sort of market anomaly (legislation, etc). The platform sounds interesting and I'm working on a similar problem in a durables market. Would love to talk more on tactics offline if you're interested/available.
    - jim_greco 12y ago
      Every market usually has the problem of a lot of supply and little demand or a lot of demand and little supply. We were former US Treasury traders so we understood the part of the problem to best attack first. Other asset classes like corporate bonds are the opposite market dynamics and we are still figuring out the right approach. Would love to connect. First initial last name at directmatchx.com
  - jbapple 12y ago
    Why is the buy-side in the driver's seat now?
    - galen211 12y ago
      There's been a lot of concentration in assets under management among a few top buy-side institutions while dealers have reduced their risk tolerance/balance sheet and been displaced by electronic market makers, relative value hedge funds, and proprietary trading shops.
vasilipupkin 12y ago
aren't you being a little bit misleading here? brokertec and espeed exist and are available. Banks don't want to trade many of the illiquid bonds electronically, but the issue IS NOT lack of availability of electronic platforms where they could do it.
- galen211 12y ago
  Brokertec and eSpeed are inter-dealer platforms. If you're an asset manager, pension fund, or even a central bank, you can't trade without going through a bank. The point is to create a market that treats investors the same as banks.
  - vasilipupkin 12y ago
    it's not entirely true, since HFT firms trade on them directly without going through a bank. The issue is there is no liquidity on these platforms for bonds other than on the run treasuries because banks don't want to provide it. Without banks providing it, there will be nothing for pension funds to trade. here is from their website "BrokerTec facilitates both API and manual trading for institutions, banks and non-bank professional trading organisations"
    - galen211 12y ago
      HFT firms can only access on-the-run trading currently. That doesn't mean the bank is responsible for all the liquidity in off-the-runs. It's just highly inefficient that intermediation has to occur via the swapbox, which isn't accessible to electronic market makers. There are plenty of relative value hedge funds that would take the other side of buy-side flows, if they had access to a market where they could show their trading intentions anonymously.
      - jbapple 12y ago
        If Direct Match has enough success, what would stop ICAP/BrokerTec/eSpeed from allowing HFT firms to trade off-the-money and snatching back up the market?
ipsin 12y ago
What's the case for small investors to buy bonds? So I feel barely competent to purchase stocks, because there's honestly a lot of crystal ball holding involved. Is the company going to grow? Is that already priced in? Etc. It seems like bonds are case where the returns will be paltry or risky, and when risk is involved, the small investor will be least good at measuring that risk.
- justincormack 12y ago
  The market in general is not aimed at small investors, with some exceptions (governments usually have ways to buy their bonds, some tax freindly areas like munis in US are ok). Often minimum sizes are large, the documentation is complex, issues are all different, and so on.
- galen211 12y ago
  Diversification. Also, even if investors don't buy bonds, prices in the bond market still affect them. Treasuries represent the price of 'cash in the future' since they are risk-free assets. Everything from mortgage rates to the cost of credit for companies is fundamentally dependent on price discovery in the Treasuries market.
- prostoalex 12y ago
  Protection of principal with steady cashflow. It's equivalent to buying a long-term CD from the bank with a slightly better rate.
- nandemo 12y ago
  There are 2 ways to read your question. 1) What's the case for small investors to buy bonds, whether by buying them directly or via a bond fund? In this case, I recommend reading up on Modern Portfolio Theory and Asset Allocation or, if you just want practical information, just get a basic book like the Bogleheads guide. Basically, since stocks are risky, investors typically hold a combination of bonds and stocks. Also, because the returns for bonds and stocks are (somewhat) uncorrelated, a portfolio with a mix of bonds and stocks can have better returns with less risk (variance) than a 100% stock portfolio. Assuming your bond and stock holdings are diversified (e.g. you buy and hold index funds), the main long-term investing decision you have to make is the % you allocate to bonds and stocks. 2) What's the case for small investors to buy individual bonds instead of just investing in a bond index fund? Well, depending on where you are, you can buy government bonds without brokerage fees, so your costs might be lower. But in that case it's harder to invest the coupons by yourself. Of course bond returns are lower, but the risk is much lower too. In the case of short-term bonds issued by most developed countries, the risk of default is extremely small. The main risk is that unexpected inflation eats your returns.
Paladiamors 12y ago
In many of the fixed income markets a lot of activities are still done over the phone or inter dealer voice systems. Tullet Prebon is one such company that facilitates these activities via a voice bus. The questions come to mind are: 1. if you are providing a service to provide price feeds: - for the on the runs, then places like retuters should be able to provide that data - for off the runs, there is much less liquidity/information as mentioned here, for that a price is often paid to dealers (so no change there) 2. If you are creating an exchange then this can possibly reduce the spreads for less liquid instruments - The interesting problem you'll need to deal with is how everyone deals with settlement.
- bwhite 12y ago
  Appending to #2 above, if you're creating an exchange (or crossing network, dark venue, etc), how do you deal with settlement and counterparty issues?
throwaway283719 12y ago
Which other asset classes are you thinking of? I think that most transactions in cash equities, spot fx and futures are now done electronically. I'm sure that a large proportion of derivative trades are still done over the phone, but that's because they tend to be (a) quite customizable and (b) quite hard to price. It is incredible that treasuries are still traded over the phone, however, given how (relatively) easy they are to price. Even treasury futures, which are harder to price due to the basis and optionality, are mostly traded electronically, which tells me that there must be some parties with a pretty strong interest in keeping bond trading a "closed shop".

Dwolb 12y ago

There's a big opportunity to put people's bid/ask on a single platform, but it's always tough to build a two-sided market. Are you concentrating on building supply or demand first? What's in it for the incumbents to use this platform? Doesn't the status quo benefit them? (I'm guessing less price transparency and less liquidity in the market translates to higher fees and margins)

jim_greco 12y ago
The biggest change since the financial crisis is that the buy-side (mutual funds, hedge funds, pensions) is now in the driving seat for determining what the future of markets look like. We're seeing that with innovative new exchanges like IEX in the equities space. We've built demand on the buy-side and are now reaching out to sell-side partners who are interested in moving the market forward. The parts of the sell-side that haven't invested in technology and are holding onto their old ways aren't very excited. The parts that have are a lot more open and we are looking forward to having them onboard on day one.
- Dwolb 12y ago
  Ah great move. Capturing the scarce side of the market usually works unless there's some sort of market anomaly (legislation, etc). The platform sounds interesting and I'm working on a similar problem in a durables market. Would love to talk more on tactics offline if you're interested/available.
  - jim_greco 12y ago
    Every market usually has the problem of a lot of supply and little demand or a lot of demand and little supply. We were former US Treasury traders so we understood the part of the problem to best attack first. Other asset classes like corporate bonds are the opposite market dynamics and we are still figuring out the right approach. Would love to connect. First initial last name at directmatchx.com
- jbapple 12y ago
  Why is the buy-side in the driver's seat now?
  - galen211 12y ago
    There's been a lot of concentration in assets under management among a few top buy-side institutions while dealers have reduced their risk tolerance/balance sheet and been displaced by electronic market makers, relative value hedge funds, and proprietary trading shops.

vasilipupkin 12y ago

aren't you being a little bit misleading here? brokertec and espeed exist and are available. Banks don't want to trade many of the illiquid bonds electronically, but the issue IS NOT lack of availability of electronic platforms where they could do it.

galen211 12y ago
Brokertec and eSpeed are inter-dealer platforms. If you're an asset manager, pension fund, or even a central bank, you can't trade without going through a bank. The point is to create a market that treats investors the same as banks.
- vasilipupkin 12y ago
  it's not entirely true, since HFT firms trade on them directly without going through a bank. The issue is there is no liquidity on these platforms for bonds other than on the run treasuries because banks don't want to provide it. Without banks providing it, there will be nothing for pension funds to trade. here is from their website "BrokerTec facilitates both API and manual trading for institutions, banks and non-bank professional trading organisations"
  - galen211 12y ago
    HFT firms can only access on-the-run trading currently. That doesn't mean the bank is responsible for all the liquidity in off-the-runs. It's just highly inefficient that intermediation has to occur via the swapbox, which isn't accessible to electronic market makers. There are plenty of relative value hedge funds that would take the other side of buy-side flows, if they had access to a market where they could show their trading intentions anonymously.
    - jbapple 12y ago
      If Direct Match has enough success, what would stop ICAP/BrokerTec/eSpeed from allowing HFT firms to trade off-the-money and snatching back up the market?

ipsin 12y ago

What's the case for small investors to buy bonds? So I feel barely competent to purchase stocks, because there's honestly a lot of crystal ball holding involved. Is the company going to grow? Is that already priced in? Etc. It seems like bonds are case where the returns will be paltry or risky, and when risk is involved, the small investor will be least good at measuring that risk.

justincormack 12y ago
The market in general is not aimed at small investors, with some exceptions (governments usually have ways to buy their bonds, some tax freindly areas like munis in US are ok). Often minimum sizes are large, the documentation is complex, issues are all different, and so on.
galen211 12y ago
Diversification. Also, even if investors don't buy bonds, prices in the bond market still affect them. Treasuries represent the price of 'cash in the future' since they are risk-free assets. Everything from mortgage rates to the cost of credit for companies is fundamentally dependent on price discovery in the Treasuries market.
prostoalex 12y ago
Protection of principal with steady cashflow. It's equivalent to buying a long-term CD from the bank with a slightly better rate.
nandemo 12y ago
There are 2 ways to read your question. 1) What's the case for small investors to buy bonds, whether by buying them directly or via a bond fund? In this case, I recommend reading up on Modern Portfolio Theory and Asset Allocation or, if you just want practical information, just get a basic book like the Bogleheads guide. Basically, since stocks are risky, investors typically hold a combination of bonds and stocks. Also, because the returns for bonds and stocks are (somewhat) uncorrelated, a portfolio with a mix of bonds and stocks can have better returns with less risk (variance) than a 100% stock portfolio. Assuming your bond and stock holdings are diversified (e.g. you buy and hold index funds), the main long-term investing decision you have to make is the % you allocate to bonds and stocks. 2) What's the case for small investors to buy individual bonds instead of just investing in a bond index fund? Well, depending on where you are, you can buy government bonds without brokerage fees, so your costs might be lower. But in that case it's harder to invest the coupons by yourself. Of course bond returns are lower, but the risk is much lower too. In the case of short-term bonds issued by most developed countries, the risk of default is extremely small. The main risk is that unexpected inflation eats your returns.

Paladiamors 12y ago

In many of the fixed income markets a lot of activities are still done over the phone or inter dealer voice systems. Tullet Prebon is one such company that facilitates these activities via a voice bus. The questions come to mind are: 1. if you are providing a service to provide price feeds: - for the on the runs, then places like retuters should be able to provide that data - for off the runs, there is much less liquidity/information as mentioned here, for that a price is often paid to dealers (so no change there) 2. If you are creating an exchange then this can possibly reduce the spreads for less liquid instruments - The interesting problem you'll need to deal with is how everyone deals with settlement.

bwhite 12y ago
Appending to #2 above, if you're creating an exchange (or crossing network, dark venue, etc), how do you deal with settlement and counterparty issues?

throwaway283719 12y ago

Which other asset classes are you thinking of? I think that most transactions in cash equities, spot fx and futures are now done electronically. I'm sure that a large proportion of derivative trades are still done over the phone, but that's because they tend to be (a) quite customizable and (b) quite hard to price. It is incredible that treasuries are still traded over the phone, however, given how (relatively) easy they are to price. Even treasury futures, which are harder to price due to the basis and optionality, are mostly traded electronically, which tells me that there must be some parties with a pretty strong interest in keeping bond trading a "closed shop".