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February 2, 2021 was an exciting day for Wall Street spectators.
A slew of market-moving headlines had dropped throughout the day that had whipped investors & media outlets into an energetic frenzy. The GameStop/Reddit drama was still unfolding as meme stocks reversed from highs the previous week. Lawmakers traded speeches & interviews on various networks as a fresh COVID stimulus bill made its way through Congress. Later in the day Amazon made waves when it announced founder & CEO Jeff Bezos would step down from the company to be replaced by Andy Jassy.
I was also whipped into an energetic frenzy that day, but for none of the above reasons. Lost in the fallout of Amazon’s big news & meme stock volatility was the announcement that Tradeweb planned to buy eSpeed from Nasdaq for $190 million in cash. As a market structure geek, the deal’s irony made me chuckle. As a Tradeweb shareholder, it made me excited about the exchange’s long-term ambitions in the US Treasury market. eSpeed has a deep & colorful history that intertwines with every major North American exchange & the evolution of US Treasury trading to the electronic age. I want to spend this post chronicling eSpeed’s story & use it to explain how the US Treasury market works, how exchange competition is evolving, and how Tradeweb’s purchase makes me more excited about the stock.
We begin in 1996:
Cantor Fitzgerald’s Golden Era
Before the advent of electronic trading, US Treasuries, like most other assets, traded over the phone through a web of banks, broker-dealers & buy-side clients. Named “voice trading”, this analog way of making markets was dominated by one firm - Cantor Fitzgerald, an investment bank formed in 1945 and led by billionaire Howard Lutnick. Cantor Fitzgerald rose to prominence in the 1970s by licensing its bond data to Telerate, one of the top institutional terminals at the time. Any customer using Telerate’s product could only access Cantor Fitzgerald bond prices, giving the firm a crippling advantage over competitors. CF enjoyed a golden era of US Treasury trading in the 1990s as its firm grip on market share held steady and new technology gave them a chance to cement their leading status for good.
In 1996 Cantor Fitzgerald began building an electronic trading platform for government bonds, called eSpeed. The plan was to migrate CF’s existing voice business to this platform over time, cutting costs & improving efficiencies for clients to defend market share. With most of the UST market already under its purview, this transition seemed like an inevitable death-knell for competing dealers looking to take share away from Cantor Fitzgerald down the road.
Rival bond dealers knew what eSpeed would do to their UST business and knew they had to respond. In 1999 a group of banks formed a consortium and started their own electronic trading platform for US Treasuries, called BrokerTec. To lead BrokerTec the consortium chose a former banker named Lee Olesky, who took the exchange’s helm after co-founding a small, fledgling bond platform of his own, called Tradeweb, in 1998. BrokerTec’s goal was simple - disrupt Cantor Fitzgerald’s hold on the US Treasury market & stop eSpeed from creating a monopoly in the space. The task would not be easy, but top banks working together for a common goal would have a better chance of success than trying to do it alone.
The stage looked set for an intense clash between eSpeed and BrokerTec that would define how US Treasuries would be traded for decades to come.
That is, until everything changed the morning of September 11, 2001.