| The US Treasury market has experienced substantial structural changes in the past several years, with technological innovations and improved governmental finances both having large impact on the marketplace. One of the most important innovations in the secondary market for fixed income securities has been the introduction of electronic trading systems onto the trading desks at dealer firms. Electronic trading has become an indispensable element of day-to-day business practices, and hardly a day goes by without a new initiative being announced by dealers, dot-coms, regulatory authorities, or some combination of the above. The impact has been particularly hard felt in the interdealer market for US Treasury securities as all of the major IDBs have established electronic trading platforms and several new entrants have been attracted to the market.
The key to success of any electronic IDB platform, however, will be the ability to attract liquidity. Those that are able to attract and sustain trading volume will be the systems that ultimately survive. TowerGroup believes that the IDB industry, and in particular the electronic-broker sector, will experience a period of consolidation in the next several years as systems that fail to attract sufficient pools of liquidity will merge with competitors, be abandoned, or remain simply as deminimus components of larger product lines. The volume of available business cannot support the number of systems currently in the marketplace, particularly given the great importance that market participants place on pools of liquidity. When the dust settles, only three or, at most, four systems can be expected to survive.
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