Shake-up in US Treasury clearing market now shaken-down

Direct Match, a company that has been trying to shake-up the US Treasury market has suffered a major setback, leading it to suggest that there are deep problems in US Treasury clearing.

"The US Treasury market is broken" says Jim Greco, at Direct Match, which he founded from the dream to make the market work better for everyone.

But after losing a major partner, the company said: "We are not able to execute on our vision anytime soon."

The idea was to create 'all-to-all' trading pools. In this scenario, banks, pension funds, asset managers and high-frequency traders can take part in the business of treasury bond trading, and with each other. 

Direct Match is not alone, others share the vision, but Direct Match was one of the most high-profile players in the game.

Writing for Business Insider, Jim Greco said: "The Treasury market is different from other financial markets in that it combines a high level of opacity with a light regulatory environment. It also has been undergoing a profound evolution since the financial crisis. Reforms passed in response to the crisis have reduced dealer balance sheets committed to market making. Meanwhile, high-frequency trading firms have leveraged technology to dominate the interdealer platforms from which dealers source liquidity."

To begin with, things seemed to go swimmingly for Direct Match, it had commitments from 60 clients, then its key partner, State Street, pulled out citing conflict of interest concerns. 

Greco said: "At first, the reason for our difficulties was not clear given how common new entrants are in other asset classes. Slowly it become clear that there are deep problems in US Treasury clearing as well. In US Equities, for example, the clearing solution (the NSCC) is a utility to which any broker-dealer has access. Uniquely in Treasuries, the dealers are serviced by a utility (the FICC) that they own, and everyone else is at the mercy of an ever shrinking oligopoly of clearing firms who are themselves dealers, or are dependent on them."

He continued: "My greatest error was that I was so committed to altering the competitive landscape in the front-office that I did not adequately structure the firm to simultaneously attack the noncompetitive landscape in the back-office." 

The FT quoted Kevin McPartland, Head of Market Structure at Greenwich Associates as saying: "Building liquidity from scratch is very, very hard... You need a strong network to make it work and creating that is difficult."