BrokerTec outage serves as ‘systemic risk’ wake-up call

January 11 shutdown of the dominant US Treasury market platform worries participants

Burning chip

An outage on BrokerTec that shut down trading of US Treasuries for nearly an hour and a half earlier this month has renewed concerns that the platform represents a single point of failure in arguably the world’s most important bond market.

“It woke everybody up, showing that there is systemic risk. We were very fortunate that it was a Friday afternoon and not too much was going on, but it could have been at a much worse time,” said Dawn Newsome, chief technology officer for rates trading at Nomura Securities, speaking on a panel at the Rates Evolved event in New York yesterday (January 24).

BrokerTec, the CME-owned platform that facilitates around three-quarters of all US Treasuries trades, went down for an hour on January 11 between 2.11pm and 3.35pm New York time due to a technical malfunction. Trading of US repo, agency bonds, to-be-announced securities linked to mortgages and Canadian government bonds were also affected.

A CME spokesperson says the outage occurred after an internal error required the matching engine to be restarted.

“All trades for the day were reported and flowed through the system properly and mitigation measures have already been taken to prevent a re-occurrence of these events,” says the spokesperson.

Speaking on the same panel, Richard Winter, global head of product strategy and sales at BGC Fenics, a rival start-up platform, said the market “froze” during the period BrokerTec was down, as liquidity providers did not shift to other trading venues.

“Unintended biases meant liquidity providers who set the price for the US Treasury market ended up leaning towards that one place as a source of information. Every other viable platform lost their liquidity because the liquidity providers lost confidence in the information they were getting,” he said.

Fellow panellist John Shay, formerly of Virtu Financial and head of Nasdaq Fixed Income, said it showed there is something “really wrong” with the US Treasury market.

“We do have that concentration of volume in one spot, and you expect those flows just to shift [during an outage], but they don’t, and it’s very telling that something is really wrong in the fundamental design of the US Treasury market,” he said.

“Unhealthy” dominance

The response to the shock outage revives long-standing concerns over BrokerTec’s position in the marketplace. Shay – now a senior adviser at fintech firm Broadway Technology – once described the platform’s dominance as “unhealthy”, while others have questioned its credit monitoring practices given it acts as principal for cleared and non-cleared trades.

BrokerTec makes up an estimated 72% of the interdealer US Treasury market, according to research consultancy Greenwich Associates. In the past, that figure has been estimated to be as much as 85%, but increased competition and new ways of directing liquidity have eroded some of the venue’s market share.

However, that market dominance is still too much for some individuals.

“Over the last few years, there’s been a very clear, singular, dominant place for liquidity to be found. That’s a problem and it has been talked about for a number of years, and everyone identified that where we were heading was pretty uncomfortable,” said BGC Fenics’ Winter.

Meanwhile, the outage is forcing Nomura to rethink how it sources its US Treasuries liquidity.

“It certainly made us all rethink our strategies in terms of where we’re getting liquidity and where we have to support to ensure there is an efficient market out there at all times,” said Newsome.

Editing by Lukas Becker

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