Primary dealers, the select group of banks and brokers that have held a seat at the center of the U.S. government debt market since 1960, are losing influence.
More than 20 percent of the $538 billion of Treasury notes auctioned this year have been awarded to bidders who bypassed the dealers by using a website to place their orders, according to data provided by the U.S. Treasury Department. That’s almost double the 2011 level and up from 5.6 percent in 2009.
In the same way technology eroded the middleman role once played by travel agents and stock-market specialists, increased use of the direct-bidding system threatens government-bond traders at firms ranging from Bank of America Corp. to UBS AG. It also has eaten into profits from a business that’s among the least affected by the regulatory changes and new capital requirements reshaping the industry.
“You’ll see clients do a lot more things in a self- sufficient manner than they used to do before,” said Richard Prager, global head of trading at BlackRock Inc., the world’s largest asset manager with $3.8 trillion. “It’s just the realities of today.”
Traders at primary dealers have complained to the Treasury and the Federal Reserve Bank of New York about direct bidding, which they say is reducing their profitability, according to seven government-bond traders who requested anonymity because they weren’t authorized to comment publicly. Their job is becoming more frustrating, and sometimes money-losing, now that they’re competing in auctions against anonymous investors who can show up at any time and at any price, the traders said.
Investor Shelter
“A lot of the value of being a dealer is being at the nexus of the information flow,” said Jason Evans, a former Treasuries trader at Goldman Sachs Group Inc. and Deutsche Bank AG who started his own fund, Ninealpha Capital LP, in 2009. “That is being eroded through electronic trading and direct access to exchanges, and it’s also being eroded in the primary market through Treasury direct access. It’s just an erosion of their competitive advantage.”
As the deepest and most-liquid bond market in the world, U.S. Treasuries have served for decades as a shelter for investors fleeing risks such as the 1987 stock-market crash, the Russian government’s 1998 debt default, the Sept. 11, 2001, terrorism attacks and the 2008 financial crisis. The default investment of governments such as China and Japan, Treasuries serve as a benchmark for everything from corporate borrowing costs to home loans.
Primary Dealers
Primary dealers are required to bid for no less than their pro-rata share at Treasury auctions -- 4.76 percent for each of the 21 dealers currently designated by the New York Fed. Bids must be “reasonable” compared with the range of prices in the so-called when-issued market before an auction, according to New York Fed rules. The dealers also provide market commentary and analysis helpful in conducting monetary policy and act as counterparties when the Fed buys or sells bonds.