Direct Match Holdings Inc., which aimed to be an alternative to bank dominance in the $13 trillion U.S. Treasury market, died before it arranged even one trade.
The New York-based startup wanted to give hedge funds and asset managers the same type of anonymous, exchange-style trading that banks and sophisticated electronic firms have enjoyed for years. The problem: Direct Match needed to partner with one of those banks to access the Treasury market’s clearing-and-settlement plumbing. State Street Corp. initially agreed to such a deal, then canceled it, dooming Direct Match.
Banks still dominate Treasury trading and get to act as gatekeepers that can block potential competitors, unlike other major markets like U.S. stocks. IEX Group Inc. just opened the nation’s 13th stock exchange, a year after seeking regulatory approval. It didn’t need a bank partner to get wired into the market. With Treasuries -- one of the world’s key assets -- Wall Street’s biggest banks still pull the strings.
“Until more attention is paid to the plumbing of the U.S. Treasury market, startups will struggle to bring innovation to the marketplace,” Jim Greco, a co-founder of Direct Match, said in an interview. Greco outlined his struggles with Direct Match, which shut down before completing even a test trade, in an essay published by Business Insider on Aug. 23. “In our conversations with regulators, we encouraged them to establish fair and consistent rules for centralized clearing that will expand access to the market and enable greater competition among venues,” he added during the interview.
Anne McNally, a State Street spokeswoman, declined to comment.
Dealers and Clients
About $500 billion of Treasuries trade each day, according to the Securities Industry and Financial Markets Association. Just under half of that takes place one-on-one between dealers and their clients, according to a report last year by the Federal Reserve Bank of New York. This segment is dominated by five banks that control 60 percent of volume, up from 44 percent a decade ago, according to consulting firm Greenwich Associates, which didn’t name the firms.
It’s an opaque market, where the size and price of trades are known only to participants in the transaction, making it hard for investors to know whether they’re getting a good deal. Trading can be done over the telephone or through electronic auctions hosted by Bloomberg LP, the parent of this news organization, and Tradeweb Markets LLC.
The rest takes place on electronic markets owned by ICAP Plc, Nasdaq Inc. and Tradeweb. Here, the size and price of trades are known to all users of the system, which are mostly Wall Street dealers and automated trading firms such as Jump Trading LLC.