Liberty Street Econimics – New York Fed – Unlocking the Treasury Market through TRACE Doug Brain, Michiel De Pooter, Dobrislav Dobrev, Michael Fleming, Peter Johansson, Collin Jones, Frank Keane, Michael Puglia, Liza Reiderman, Tony Rodrigues, and Or Shachar.

“The U.S. Treasury market is widely regarded as the deepest and most liquid securities market in the world, playing a critical role in the global economy and in the Federal Reserve’s implementation of monetary policy. Despite the Treasury market’s importance, the official sector has historically had limited access to information on cash market transactions. This data gap was most acutely demonstrated in the investigation of the October 15, 2014, flash event in the Treasury market, as highlighted in the Joint Staff Report (JSR). Following the JSR, steps were taken to improve regulators’ access to information on Treasury market activity, as detailed in a previous Liberty Street Economics post, with Financial Industry Regulatory Authority (FINRA) members beginning to submit data on cash market transactions to FINRA’s Trade Reporting and Compliance Engine (TRACE) on July 10, 2017. This joint FEDS Note and Liberty Street Economics blog post from staff at the Board of Governors of the Federal Reserve System and Federal Reserve Bank of New York aims to share initial insights on the transactions data reported to TRACE, focusing on trading volumes in the market. The Structure of the Treasury Market – To inform our approach in analyzing the TRACE data, we model the Treasury market in the figure below, dividing it into three segments: interdealer broker (IDB), dealer-to-dealer (DTD), and dealer-to-client (DTC). IDBs historically have intermediated trades between dealers. However, after IDBs introduced electronic trading platforms, they also eventually opened up to firms beyond the traditional bank and dealer community, notably principal trading firms (PTFs) which specialize in electronic and automated intermediation. The DTC space has evolved as well, with request-for-quote platforms, for example, enabling clients to solicit bids and offers from multiple dealers electronically. More recently, some PTFs have begun offering direct stream services to dealers, which feature live, continuous, executable prices, delivered electronically under bilaterally negotiated terms…”