Under the hood of CBOE’s new US Treasury platform

Dan Barnes

Market and infrastructure operator, Cboe Global Markets, is planning to introduce a new dealer-to-dealer electronic trading platform for on-the-run US Treasuries called ‘Cboe Fixed Income’, specifically design for trading in large size.

Ben Leit, global head of FX Sales at Cboe.

“The liquidity options FICC dealers have today are all sweepable order books that can cause more market impact than they would like, so we feel that they are underserved in that regard,” says Ben Leit, global head of FX Sales at Cboe, “That is why we are targeting them with the ‘Full Amount’ protocol, and it also makes sense for them because they tend to have larger order sizes.”

This will be Cboe’s first cash US Fixed Income product offering, and is planned for launch in the second quarter of 2022, subject to regulatory approvals.

The engagement will place Cboe squarely into a very competitive market, which is currently dominated by CME’s Brokertec, but also has offerings from BGC and Tradeweb, which bought a former BGC platform ‘eSpeed’ from Nasdaq OMX in 2021.

Lain Garrett, director of US Treasuries Product Management at CBOE.

Lain Garrett, director of US Treasuries Product Management at CBOE, “We’re fully aware of how overcrowded it is, but the way we are looking at it is most of the incumbent offer slight differences but for the most part they are aggregated and allow participants to be swept. That leaves firms open to negative market impact, fill rate slippage and on the receiving end of exhaust. So what we are proposing with Full Amount, is similar to an all or none protocol. They will be able to do block sizes and they won’t be information leakage with the liquidity provider and consumer singularly knowing that the trade has taken place.”

Cboe’s ‘Full Amount’ technology is a proven model from Cboe FX used to enable large order risk transfer with low impact, and will be used together with Cboe’s liquidity curation and analytics capabilities.

That will distinguish the platform from other interdealer trading models in the marketplace, which typically use the ‘workup’ protocol used by eSpeed and Brokertec, which a Brokertec patent described as “a single deal extended in time.”

Workup has been controversial at times, going back to 2014 when banks told The DESK that the high-frequency trading (HFT) firms were able to hold trades for several seconds on an interdealer platform, while simultaneously trading in the Treasury futures market on CME in which prices moved at sub-second speed. This allowed them to trade only when price movements were favourable.

“As a former government bond trader I’m very familiar with the workup and some of the issues that go along with it,” says Garrett. “Full Amount is completely different because there is no information leakage, there is no market data – price, size etc – that is going out to all participants, this is banded liquidity if you will. If they are trading at a given size they will see the price for that size and if the price is there they will trade with us and that will eliminate the workup process altogether, so we are trying to go after large block style trades with no information leakage or screen flash where the world sees the price and the size that is going through.”

Through the Full Amount matching protocol, liquidity consumers should be able to transact against the best quote from a single liquidity provider, while satisfying the full amount of the order to help minimise information leakage and slippage. Trades also will print in single executions, reducing ticket costs.

In addition, Cboe Fixed Income will provide customised liquidity curation services to help participants manage liquidity segmentation. Cboe expects to actively engage with customers to analyse flows and provide insights to support informed trading decisions.

“We are excited to bring the best of what we do in the global FX market to the U.S. Treasuries space,” said Jonathan Weinberg, senior vice president and head of FX and US Treasuries at Cboe Global Markets. “Cboe Fixed Income is designed to address some of the biggest challenges that dealers face today, including flow segmentation, information leakage and high hedging costs. We believe the new trading platform will provide a unique solution that enables liquidity providers to interact directly with high-quality order flow, reduce market impact and receive opportunities for price improvement.”

Cboe Fixed Income is in the process of registering with the Securities and Exchange Commission (SEC) as a government securities broker-dealer and becoming a member firm of the Financial Industry Regulatory Authority (FINRA). As there are proposals to bring some US treasury trading platforms under the ATS regulatory framework it is possible that Cboe Fixed Income may also fall into that category.

“It is something we are very much aware of and we will adapt as changes come,” Garrett says. “But for our launch there is no immediate impact.”

Participants can code to the Cboe Fixed Income technology specifications, and access to the platform is also expected to be made available through vendors in the marketplace. Any FICC dealer will be able to trade on the platform, initially in US hours, 7.30am to 5.30pm Eastern time, although there are plans to extend those.

©Markets Media Europe, 2021