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Algorithmic trading set to transform the bond market

Intermediating the bond markets is shifting from a principal risk-taking business for banks to a brokerage business. At a time when the IMF is warning of bond market illiquidity, innovative solutions are springing up. In the high-volume government bond markets, trade-execution algorithms will be new drivers of efficiency. In the corporate bond markets, new systems will drive efficient internalizing of orders and matching across networks of dealers.

Quantitative Brokers (QB) is an agency broker in the interest rate futures markets that has grown quickly in its six-year history as some of the biggest hedge funds in the business have employed its trade-execution algorithms to reduce transaction costs and slippage.

It is now poised to bring versions of these algorithms to the cash market in US treasuries in what might prove to be a pivotal development for the bond markets.

News of this initiative comes just as the IMF highlighted in its April global financial stability report a growing problem in the bond market that asset managers have been complaining about to Euromoney for almost two years: poor liquidity caused by reduced dealer inventories.

High regulatory capital charges are discouraging banks from warehousing on their balance sheets bonds that one investor wants to sell and holding them for the indeterminate period – a minute, an hour, a day, a week – before a second investor can be found to buy them.


Stu Taylor, founder and chief executive of Algomi, a firm that aims to improve banks’ ability to capture the internal information that might allow them to spot offsetting buy-and-sell queries from investors, tells Euromoney: “In the credit markets, before the financial crisis, dealer inventory might have been up to 5% of market outstandings.

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