Toomre Capital Markets LLC

Real-Time Capital Markets -- Analytics, Visualization, Event Processing, and Intelligence

Algorithmic Trading to Continue to Increase in U.S. Treasury Securities

Bloomberg published an article entitled “Morgan Stanley, BNP Secret Codes Give Edge in Treasury Trades” on November 27, 2005 that summarizes recent developments in the use of algorithmic trading in the U.S. Treasury market. The main theme of this article is that black box algorithmic trades has emerged from near non-existent status three years ago to now helping boost trading of $4 trillion in outstanding securities to record levels. More than a third of the 22 primary dealers now use black box trading systems and the article suggests that both the volume and percentage attributable to algorithmic trades will continue to increase.

Wall Street and Technology has further information on Algorithmic Trading in the fixed-income markets in a story written on October 25, 2005 by Daniel Safarik entitled "Fixed Income Meets The Black Box." This article has more information on the developing competition beween eSpeed and Icap, and details that black-box trading is now accounting for a significant portion of liquidity.

Toomre Capital Markets concurs with the perspective that algorithmic trading will continue to penetrate the more liquid sectors of the fixed-income (and foreign exchange markets). What will be very interesting is how these systems react in times of stress and/or when dealing with less liquid securities or trading environments. How, for instance, would these systems reacted to the October 1987 stock market stress or the 1998 Long-Term Capital Management events?