WASHINGTON--The computer age is bringing the government securities market to ever greater levels of sophistication and speed.
Last week, the Treasury Department unveiled a new system allowing registered dealers and brokers to place orders for government securities directly with the Federal Reserve--and do it while sitting at their office computer terminals.
The system is part of the ongoing effort by federal officials to automate bidding procedures in the government market and expand the number of participating firms. Officials have been stepping up their efforts to open the government market since the Salomon Brothers Inc. trading abuses came to light last year.
The system will permit non-banking firms to place bids, for themselves or their customers, on all types of Treasury securities -- bills, notes, and bonds -- in government auctions. Currently, competitive bidding in the government market is dominated by 39 primary dealers and other large financial institutions.
In addition, registered dealers and brokers will be able to place non-competitive bids, which typically account for under 5% of a total offering. In a non-competitive bid, the investor agrees in advance to buy the security at the average yield determined by the auction.
One major advantage for smaller firms is that they will no longer have to place orders with larger firms or banks. Not surprisingly, dealers that stand to benefit from the change are enthusiastic, saying they'll be able to save money and mix it up with the big guys.
"That would be marvelous," said John S. Haertel, vice president and manager of fixed-income for Summit Investment Corp. in Minneapolis. "It would be a great help to us. It would give us one more tool which we could use to be competitive, and it would help the government distribute securities in the market. It's a win-win situation as far as I can see."
As Mr. Haertel discussed the new system, the bond market was chalking up gains on a Commerce Department report that housing starts fell an unexpected 17% in April. The firm's trading desk was taking telephone orders for a Treasury offering of two-year and five-year notes.
He was in the process of placing a $2 million order from a client, but the order had to be placed through a local bank that was competing for the same business.
As a result, Mr. Haertel said, "I have to shave it pretty thin to get my money."
Before last week's announcement, only banks and other depository institutions could place tenders for Treasury securities through the "Fedline" terminals. The network is part of the electronic payment system that connects over 9,000 depository institutions to their Federal Reserve district banks.
Dealers and other non-depository institutions will be provided the same software that the banks use to bid in the government market. A firm will only need its own computer, a modem, and an encryption -- or security -- device that can be purchased from the local Federal Reserve bank. The software will be provided free of charge, officials said.
To qualify, companies also must agree to abide by Treasury auction rules and have an "autocharge" agreement with a bank, which guarantees payment for any securities that are purchased.
The Treasury began allowing firms other than primary dealers and depository institutions to bid on behalf of customers in the government market last year, provided they set up an autocharge agreement. So far, 41 firms have applied and 16 are qualified, according to a spokesman for the Treasury Department's Bureau of Public Debt.
The software for the new electronic link for dealers and brokers was developed by the Federal Reserve Bank of Kansas City in consultation with the Treasury, which is responsible for the government's debt auctions.
Work on the project began in early 1991, before the trading abuses at Salomon Brothers became public, but it took on renewed urgency as officials sought to expand trading and deflect pressures from Congress for reforms that would be manadated by law.
A bill introduced by Henry Gonzalez, D-Tex., chairman of the House Banking Committee, would require the Fed and the Treasury to set up an automated bidding system for the government market by the end of the year. Both agencies are resisting the idea, saying they should be given time to go ahead and modernize bidding procedures on their own timetable.
In fact, Fed officials say, a fully computerized bidding system that will include the primary dealers who dominate the competitive side of the market is planned for completion by the end of the year.
When the automation is complete, federal officials will have an electronic record of transactions to assist them in monitoring the market and enforcing Treasury rules. For example, one firm may not acquire more than 35% of any issue at an auction -- the rule that Salomon Brothers violated, in one case getting control of 94% of a two-year note issue.
Fed officials are enthusiastic that the dealers will find the electronic bidding easy to use. The Fedline system is simple and menu-driven, they say, and dealers will get the same system for their computers.
"We're excited about it since we were directly involved, but I think all the people in the Treasury and Fed people are glad to have this available because it improves the process for everybody," said Brad Cloverdike, an assistant vice president at the Federal Reserve Bank of Kansas City who worked on the new system.
The system could eliminate paperwork and save time, allowing more time to take orders from customers before the bidding deadline, said Doug Bertz, managing director for Wheat, First Securities Inc. in Richmond, Va. "We would definitely be interested in doing it."
Currently, the firm collects customer orders and sends them to a New York office, where a runner drops off all orders with the New York Fed.
"It would be a benefit to us," said Bob Petrocelli, treasurer for L.P. Cook Government Securities Inc., a small dealer in New York that now must place its orders five minutes ahead of deadline through a primary dealer.
The new system, says Mr. Petrocelli, could benefit smaller firms and remove the considerable advantage primary dealers have by knowing the market's level of interest.
"The whole thing in the market," he said, "is to be objective and not reveal your hand."