07.13.2017
By Rob Daly

SEC Eyes Fixed Income Market Structure

US Securities and Exchange Chairman Jay Clayton is turning his attention towards the fixed income market.

The new chief regulator has instructed SEC staff to develop a plan to create a Fixed-Income Market Structure Advisory Committee similar to the Equities Market Structure Advisory Committee established under Chairperson Mary Jo White.

Jay Clayton, SEC

“Like the EMSAC, this committee would be made up of a diverse group of outside experts, who will be asked to give advice to the Commission on the regulatory issues impacting fixed income markets,” Clayton said addressing the Economic Club of New York.

Creating such an advisory body would only help the industry if it could apply some of the best practices of the equities market to the fixed income market, noted Alastair Hawker, head of North American sales at agency algorithm provider  Quantitative Brokers.

“In reality, there is a lot to learn from how the equities market operates that could be applied here,” he told Markets Media. “Some people may think that the equities market structure is too complicated with everyone having very sophisticated smart order routing logic and 40 venues where you can trade US stocks. However, the electronification of the equities market just is so far ahead of the fixed income market.”

One of the first issues that the new advisory committee should address is market transparency, according to Hawker. “Anything which can head towards a real-time consolidated tape equivalent like how the equities world operates would be a good development for the industry.”

Access to a greater amount of execution data, such as FINRA has begun collecting, would help further electronify the fixed income market and lead to increased adoption of algorithmic trading in the highly liquid on-the-run contracts.

Hawker doesn’t believe that it would do much to solve the continuing bifurcation of liquidity between on-the-run and off-the-run contracts, however.

Alastair Hawker,
Quantitative Brokers

“I would look at off-the-runs, in the same way, I would look at corporates,” he explained. “There are various ways to trade them like using auctions and dark pool matching technologies, but I do not see them evolving further than how they trade currently for a while.”

He does not discount the potential of off-the-runs trading algorithmically if the market could provide reliable liquidity with reasonable spreads, electronic pricing, and, preferably, a central limit order book.

“We have our eye on expanding into off-the-runs,” said Hawker. “We really are just thinking about that. It is not firm, and we haven’t moved in that direction yet.”

There probably only a handful of off-the-runs that Quantitative Brokers would support initially, but it would not be an extensive list, he noted. “The industry would need to walk before it could run. I see a lot more algorithmic trading for on-the-runs before it becomes practical in the off-the-run-space.”

Chairman Clayton also announced during his speech that he spoke with Chairman Jeb Hensarling and Chairman Bill Huizenga of the House Financial Services Committee and its Subcommittee on Capital Markets, Securities, and Investment regarding holding a hearing on fixed income market structure.”

“I look forward to working with Congress on these issues,” he added.

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