BrokerTec Chicago goes live, targeting RV traders

New venue aims to wrestle cash leg of Treasury-futures basis trades from streaming venues

Key points Summary Q&A

• CME Group has launched its second central limit order book for US Treasury trading in Chicago, aiming to capture market share from relative value traders.
• The cash leg of Treasury-versus-futures basis trades tends to be done on direct streaming venues, but CME believes a new Clob co-located with the futures exchange will reduce latency and attract users.  
• The new BrokerTec Chicago allows smaller trades of $100,000 to align with the futures market and offers tighter price increments.
• Banks including Citi, JP Morgan and Morgan Stanley have signed up to make markets on the new platform.
• An electronic rates trading head at a US bank, though, believes direct streaming will remain the preferable way to execute cash trades.

These summaries are generated by an LLM, but edited by humans.

CME Group’s second central limit order book (Clob) for US Treasury trading has gone live in Chicago, co-locating its cash and futures exchanges in one place in an effort to take market share for growing relative-value trading volumes away from streaming platforms.

“Over the last 10 years in the Treasury market, liquidity in US Treasury futures has grown relative to the cash market, creating what we would see as increased client demand for [relative value] trading strategies. And we’ve been looking at how best we can deliver that and bring cash and future markets closer together,” says John Edwards, global head of BrokerTec.

BrokerTec Chicago, which opened for trading October 6, allows clients to trade smaller notional sizes and all seven on-the-run benchmark Treasuries, which range from two-year to 30-year bonds.

Lowering the minimum notional size of trades to $100,000 makes it easier to align trades with the futures market, and tighter price increments – down to 1/16^th of a 32^nd – enable more precise hedging. By comparison, the minimum notional size for a trade on BrokerTec’s New York venue is $1 million.

John Edwards

Citi, JP Morgan and Morgan Stanley have already signed up to make markets on BrokerTec Chicago. A few other banks have connected as well, says CME, and hedge funds and other market-makers that specialise in relative value strategies have expressed interest in the new platform.

Executives at CME say they’re launching BrokerTec Chicago in response to growing demand for US Treasuries-versus-futures basis strategies from relative value traders. While the futures leg trades on CME, the cash leg has tended to be executed on direct stream via venues that knit dealer feeds together, such as Tradeweb’s Dealerweb and MarketAxess. One key reason is that the trades are seen only by the executing dealer, which reduces market impact. 

CME believes that by offering co-located Clob and futures execution in the CME data centre in Aurora, Illinois, BrokerTec can tap into a new client base.

The main advantage of co-locating its cash Treasury and futures exchanges in one place is that it helps eliminate small lags in trading for clients who engage in basis trading.

The basis trade exploits the small price gap between an on-the-run Treasury and the futures contract tied to that bond. For example, if the cash leg is executed at the same time as the future, currently orders will reach the execution venues, which tend to be based in New York, at different times due to latency and may execute at a slightly different level than expected.

Edwards declines to provide a specific metric for how much co-location will improve latency, but he says it would be “significant”.

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BrokerTec’s New York Clob will continue to operate in the cash Treasury and repo markets as it has for the past two-and-a-half decades, and the two venues will have separate liquidity and pricing pools.

Some traders see CME’s new offering as an effort to compete with BGC Group’s FMX, which launched its cash Treasury trading platform in 2018 and a Treasury futures exchange earlier this year, both based in New York City.

US commerce secretary Howard Lutnick, who served as chief executive of BGC Group and Cantor Fitzgerald until stepping back to join the Trump administration earlier this year, spun FMX out of BGC in April last year.

Edwards, though, says this was something that was in the roadmap ever since CME bought BrokerTec back in 2018.

An electronic rates trading head at a large US bank says the tighter pricing and smaller increments on BrokerTec Chicago will help bring CME in line with its competitors and would be an improvement for the larger market. Reducing latency issues will also shrink the time advantage that large hedge funds and high-frequency trading firms get from automated trading algorithms and their more robust physical trading infrastructure.

But he says streaming services like MarketAxess and Tradeweb’s Dealerweb – which allow dealers to pipe prices directly to clients – are likely to remain a more attractive protocol for dealers than a Clob.

“​​We kind of feel like the streaming platform makes more sense as a sort of long-term setup for the marketplace, as opposed to the sort of Clob setup, purely because with a streaming setup we can customise our liquidity out to clients,” says the electronic rates trading head.

“We can show what we want to show to different clients. [And] we don’t have market-makers bumping into each other on the Clob.”

Editing by Lukas Becker