Treasuries 2.0: The Door is Open
OpenDoor runs a Fixed Income dark pool, focused on off-the-run (“OFTR”) Treasuries and TIPS, the largest, but least liquid sector of the US Treasury market. Unlike other Treasury start-ups that targeted the volume rich on-the-run sector, we purposefully chose to focus on the sectors where the average daily turnover was shrinking and where the ability to efficiently clear risk in any reasonable size was lacking.
One of the biggest obstacles to growth in any new endeavor is inertia. “The status quo is fine.” “I have always traded with Joey, Tony, Marie, and Mike, why should I change?” “If it’s not broken why fix it?” “I get great fills from my dealers.” We have heard many variations on this theme in our early outreach to clients, yet we continued undeterred. We understood it for what it was—a false sense of security with the status quo.
That status quo is now in tatters and while extended periods of low volatility and stable prices provide little motivation to force incumbents to change or customers to adopt innovation; the current crisis should.
The overwhelming force with which the Fed acted has had the desired impact of calming the markets for now. And while the work in front of all market participants is appropriately focused on the immediate need, no one should lose sight of the fact that steps must be taken now to strengthen the secondary market and its ability to function on its own in the future—an opportunity missed coming out of the 2008 financial crisis.
This Coronavirus-led breakdown is putting into stark relief what OpenDoor has been focused on since inception—that status quo is not sufficient. Bank consolidation has reduced the capacity for risk in the market. Temporarily increasing the liquidity ratio will help, but it will not reverse the decade long march toward lower risk tolerance. There is no blame here, we are where we are. The question is where do we go from here? Betting the future on existing convention when we have just gotten a glimpse into what things look like when it breaks seems unwise. Leveraging technologies proven in one market and adapting them to our own seems like a good place to start.
OpenDoor was never a solution in search of a problem. We identified a growing systemic problem in the largest debt market in the world and then spent a lot of time, three-plus years now, working on a solution. Alongside the dealer-intermediated market which has long defined the U.S. Treasury market there exists a place for non-intermediated risk. An alternative pool of liquidity where buyers can find sellers without having to disclose who they are or what they are trying to do. An anonymous marketplace that matches small to large transactions among participants without concern as to whether they are buy-side to buy-side, sell-side to sell-side or buy-side to sell-side. No need for information disclosure at time of execution or bilateral trade disclosure after the trade is matched. That is OpenDoor.
OpenDoor offers an alternative to the status quo. Not a replacement, a supplemental alternative. We have a technology solution to match trades anonymously and without information leakage. We have a routing solution in TSOX that provides straight through processing, easy connectivity, and scale. We have a clearing solution with one of the largest custody banks in the world. In short, we have built an efficient mechanism to clear risk not only in OFTRs and TIPS, but other asset classes as well.
This crisis will pass one day. The question is whether everyone will return to the status quo or instead look hard for ways to mitigate the impact of such dislocations in the future. There will be new regulations to be sure, stock buybacks seem to be a place of increasing focus and blame for corporations’ inability to weather the current storm. But more important than regulation will be market-driven solutions that surface in the wake of this crisis. What is necessary is a willingness among market participants to invest the time and effort required to establish alternative pools of liquidity, not replicate what has failed to be sufficient.
OpenDoor is here, it is built, easily deployed, and we are ready to help.