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Two years ago, Citadel Securities began building up a European rates trading business. It made sense, given how electronic those markets are now becoming, the halting movement towards a “consolidated tape” for Eurozone bond trading, and intensifying competition across the board.
It seems to be going well, judging by an email that Sergio Colantuono, the market-making firm’s head of euro rates trading, sent to various European debt management offices and some other clients last week.
Someone kindly passed the email on to Alphaville, and we thought we’d share some of the titbits it contains. Citadel Securities’ own emphasis in bold below:
Volatility spiked in reaction to the war in Iran, particularly in European Rates products. Citadel Securities stepped up and provided meaningfully better liquidity to our clients, despite some traditional liquidity providers stepping back.
We ended the March with:
o #1 highest hit rate in EUR IRS, German EGBs, and French EGBs
o #3 in market share on Tradeweb for French EGBs, launched only two months ago
o #2 market share on Tradeweb for German EGBs
o #1 lowest no-quote rate in GBP swaps
We executed 50% more notional (€48.6bn) and 71% more tickets (6,441) in German and French EGBs versus our January-February average. In EUR IRS, notional increased by 325% (€1.08tn) and tickets by 159% (3,778) versus the same period.
For those blessed to have lived a life without all these acronyms, IRS mean interest rate swaps — contracts to exchange specific fixed rate cash flows for other cash flows linked to some floating interest rate like the ones central banks set sometime in the future. Because no money changes hands upfront, their size is expressed in the form of a ‘notional’ value against which the fixed and floating cash flows can be scaled. EGBs just mean European government bonds.
This is clearly mostly marketing fluff, a way for Citadel Securities to stress to perhaps some sceptical DMOs that it is a valuable and trustworthy counterparty despite the sometimes distasteful reputation that high-frequency trading firms have in some circles.
Nor is one good month or two necessarily indicative of a seismic shift. European bond markets are actually in some cases more electronic than their US counterparties, but local banks have for the most part got a pretty tight grip euro trading businesses. Citadel Securities declined to comment.
However, it IS noteworthy that Citadel Securities already seems to be making serious inroads in some markets that many might have assumed would be near-impregnable to an algorithmic market-maker, for a variety of cultural and technical reasons. Such as French government bonds, known as Obligations Assimilables du Trésor — or OATs (in case you were baffled by the headline).
For all their post-2008 woes, European banks are still large, and more able to store lots of bonds on their balance sheet than nimbler but much smaller trading firms. This makes it easier for them to act as intermediaries. Moreover, bonds frequently trade in such large chunks that investors still often prefer to arrange trades by phone.
Then there are cultural obstacles, with European banks even more tightly interwoven into their domestic financial industries than is the case in the US. Basically we just have a more bank-oriented financial system here, relative to the US, where broker-dealers and sundry trading firms have almost always been important players.
So it will therefore be interesting to see how things shake out over the coming year. Especially if the looooong-promised consolidated tape finally materialises.
