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JPMorgan Bets on Algo Expansion in World’s Largest Bond Market

The expansion comes amid ongoing concern about liquidity among US Treasuries.

(Bloomberg) -- JPMorgan Chase and Co. is expanding its algorithmic-trading offering to US Treasury investors, betting that computer-powered strategies can make further headway in the world’s most important bond market. 

Execution algos assess prices in various venues to decide how and when to trade, often by splitting up a large transaction into smaller chunks. At banks like JPMorgan, they also look to make use of the dealer’s internal flow before going out to the broader market. 

But such products have yet to infiltrate rates to the same degree as other asset classes like foreign-exchange, said Chi Nzelu, the firm’s head of fixed income, currency and commodities eTrading. That’s changing amid a proliferation of Treasuries trading platforms in recent years, which has encouraged younger algorithmic challengers to try to disrupt established players in the $23 trillion market. 

“Our algo execution framework was designed to be asset class agnostic, but there wasn’t significant demand in the rates space initially,” Nzelu said in an interview. “Now there’s a little bit of fragmentation in trading venues, so there’s more investor demand for algo execution to ensure they get the best possible pricing.”

In addition to expanding the rates offering of its execution and analytics tool, Algo Central, JPMorgan will in the coming months include the same market structure information it offers in FX space. 

The expansion comes amid ongoing concern about liquidity in the world’s largest bond market. The US Treasury’s unexpectedly early announcement this month of a program to buy back some outstanding debt securities was seen as a move to help improve trading conditions. 

However the jury is out on whether algorithmic trading is a help or hindrance to liquidity. In theory it should increase the number of trades in the market, make execution easier and help reduce the bid-ask spread. But evidence also exists that more-automated trading can increase volatility at times of stress.

Meanwhile, competition for business is heating up. Institutional investors are increasingly buying bonds direct from the US Treasury instead of relying on dealers to act as middlemen. Pacific Investment Management Co. is among those advocating for a model where investors can bypass dealers to transact directly with each other.

“Investors are becoming more advanced in the way they think about execution and having control over the process,” said Gil Holmes, global head of rates trading at JPMorgan. “US Treasury market liquidity is top of mind for us, our clients and regulators.” 

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