OpenDoor Targets Seldom-Traded Treasuries as Startup Goes Live
2017-04-25 04:01:00.2 GMT

By Liz Capo McCormick
(Bloomberg) — Susan Estes knew it was going to be a struggle getting the Treasuries-trading platform at OpenDoor Trading LLC up and running. But the wait is over. After more than two years of work, the startup she runs is set to go live Tuesday, with the goal of directly connecting buyers and sellers of older Treasuries and Treasury Inflation-Protected Securities.

The company is targeting a massive but thinly traded segment of the U.S. government-bond market, in which liquidity has suffered as post-crisis regulations dimmed dealers’ appetite for acting as middlemen. While off-the-runs represent about 98 percent of the $14 trillion in Treasuries outstanding, transactions in the debt constitute just about 30 percent of the market’s $500 billion in daily turnover.

“It’s been a heavy lift, but that’s what we expected,” Estes, an over-30-year market veteran and president of Jersey City, New Jersey-based OpenDoor, said in an interview at her office. “We weren’t replicating a business model already in existence. Trading depth in off the-runs has collapsed and OpenDoor is introducing a new market-based solution to deal with that problem.”

Non-Banks’ Challenge

The experience of OpenDoor underscores the challenges that non-banks face in breaking into the world’s biggest bond market. Direct Match Holdings Inc., another Treasuries-trading startup, saw its plan to open a platform derailed in August after it lost its clearing agreement with State Street Corp. The firm and OpenBondX LLC said in December that they intended to combine forces. Mike Felix, a representative for OpenBondX, said Monday that the two sides subsequently decided not to proceed with the union.

OpenDoor has almost three-dozen clients, including dealers, central banks, sovereign wealth funds, hedge funds, asset managers and bank portfolios. The participants have combined assets of more than $5 trillion. Firms pay no subscription fee, aren’t obliged to transact and pay a fee only for executed trades. Those needing clearing pick a sponsor-dealer, which is informed post-trade completion, and pay for that service — which provides participating dealers revenue. Unlike most off-the-run trading — currently done mainly through voice brokers or electronic request-for-quote systems, where prices are negotiated and dealers know their trading partners — OpenDoor’s platform works anonymously through a computerized matching system.

Blind Match

The firm’s web-based platform streams mid-market prices and yield spreads during its auctions. Clients can post bids and offers without their identity or trade size being revealed. The blind format allows firms to do large orders without risk of sparking price swings that worsen execution levels, Estes said. “OpenDoor’s initiative is clearly in the same direction we see the market going,” which includes creating ways “where all market participants can interact,” said Christian Hauff, chief executive officer of Quantitative Brokers LLC, a broker-dealer. “The buy-side wants and seeks liquidity but also wishes to be liquidity providers where they can as well. OpenDoor is creating an environment that is conducive to this.”

Most request-for-quote Treasuries trading takes place through platforms of either Bloomberg LP, the parent of Bloomberg News, or Thomson Reuters Corp.’s Tradeweb Markets LLC. OpenDoor’s platform will be available during set auctions, four or five times a day, spanning about five to six minutes. On Tuesday, only one auction will be held, at 11 a.m. New York time. Clients can buy or sell off-the-runs or TIPS, and trade on a spread basis versus benchmark issues and cheapest-to-deliver securities for futures contracts.

New Pool

The format means OpenDoor won’t satisfy the needs of investors looking to trade outside those windows.

“We have never defined ourselves as the go-to platform” for all types of transactions, Estes said. “The need for trading immediacy will still exist,” and so request-for-quote will still exist.

OpenDoor wants to tap dealers’ expertise — as opposed to muscling them out. The platform allows them to be sponsor- dealers — gaining fees for providing clearing — or to buy or sell securities for their accounts, or both.

“Our platform is designed to co-exist alongside current models and within a dealer’s daily workflow as it provides greater access to liquidity,” said Guy Haselmann, managing director at OpenDoor. “Creating additional, otherwise-difficult-to-source, liquidity pools is good for all participants.”

Brian Meehan, a co-founder, first pitched the idea behind OpenDoor to Estes in 2013 — after her stints heading government-debt trading at Morgan Stanley, Deutsche Bank AG and Countrywide Financial Corp. OpenDoor took on its current form in 2015, and its 17 employees have one hurdle to clear before popping the corks on their ample stock of champagne.

“Those bottles will be opened following our first matched trade,” Estes said with a smile.

–With assistance from Matthew Leising.