OpenDoor opens up trading in illiquid U.S. Treasuries
By John McCrank
NEW YORK, June 14 (Reuters) - In the first auction for old, illiquid Treasury bonds on the startup platform OpenDoor Trading, two investment firms managed to meet right in the middle of prices that buyers were offering and sellers were asking, an unusual occurrence that drew cheers from the executive suite.
"The room erupted," OpenDoor Chief Executive Officer Susan Estes said in an interview. "The ideal trade on our platform happened on the very first trade."
In six weeks since that launch, OpenDoor has taken in around $60 billion worth of orders for "off-the-run" U.S. Treasury bonds, those issued before the most recent offering, along with inflation-protected securities, or TIPS. Around $2.5 billion in trades have been matched.
Liquidity in off-the-runs has declined in recent years, with post-financial crisis regulations requiring banks to hold more capital and pull back from market-making activities.
That has made it harder and more expensive for investors to buy or sell off-the-run Treasuries, which comprise 98 percent of the $13.8 trillion U.S. Treasury market but less than one-third of average daily volumes.
"The majority of volume is now concentrated in on-the-runs, with a reasonable amount traded by bots," Estes said, referring to automated trading.
Off-the-run volumes are about where they were 13 or 14 years ago, even though the overall market is now three times as large, she said.
OpenDoor is trying to solve the liquidity problem by bringing buyers and sellers together and automating a process that has historically been low-tech.
Typically, a portfolio manager interested in a particular Treasury issue will call a large Wall Street bond dealer like JPMorgan Chase & Co or Goldman Sachs Group Inc and ask for a price. Dealers then scour the market and come back with a quote that includes an extra spread on top of the market price, so they can collect income on the trade.
OpenDoor automates that process so pension funds, hedge funds, insurance companies, trading companies, central banks and dealers can trade anonymously with each other in blind auctions.
OpenDoor charges a transaction fee to end-users to participate, but its transaction analysis has shown that buyers and sellers are getting better prices than they would with traditional methods, said Estes, who previously ran Treasury desks at Deutsche Bank AG and Morgan Stanley.
So far, six dealers are trading on OpenDoor for their own accounts, along with financial institutions representing $6.5 trillion in assets under management (AUM), she said. Another three dealers and accounts representing $14 trillion in AUM are in the final stages of connecting.
Order sizes on OpenDoor are averaging nearly $60 million and trades are averaging north of $25 million, with the busiest day volume-wise at $650 million, she said. (Reporting by John McCrank; Editing by David Gregorio and Cynthia Osterman)