20 April 2024

Humans Lose to Machines in Bond Market

#
Share This Story

While investors traditionally negotiated prices for U.S. Treasuries by telephone, they’re increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. A record 48 percent of trades in U.S. government debt have occurred on electronic platforms this year, up from 31 percent in 2012, according to a Greenwich Associates study released yesterday.

Bond managers are looking for more efficient ways to determine values in a $12 trillion market as banks use less of their own money to opportunistically buy and sell, giving them less of an edge when they pitch their brokerage services. The trend is squeezing profits on Wall Street, where firms are already facing lower trading revenues in a sixth year of record Federal Reserve stimulus that’s suppressing yields and volatility.

Market Making 

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

While electronic trading systems may allow for faster price discovery, the trend may also discourage some investors from selling bigger chunks of less-traded securities out of concern they may move prices against themselves.

While the U.S. Treasury market has more than doubled in size since the end of 2007, trading has fallen 4 percent in the period through the end of last year. Average daily trading has fallen to $498.1 billion this year through August, compared with $551.4 billion a day in the same period last year, according to data compiled by the Securities Industry and Financial Markets Association.

Fed Stimulus 

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

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

As investors prepare for rising interest rates and more volatility in the Treasury market, they’re trying to become more nimble. So far, that’s meaningless business for human traders, and more for the computers.

Click here to access the full article on Bloomberg. 

Join Our Online Community
Join the Better Way To Retire community and get access to applications, relevant research, groups and blogs. Let us help you Retire Better™
FamilyWealth Social News
Follow Us