Stay informed with free updates
Simply sign up to the Exchange traded funds myFT Digest — delivered directly to your inbox.
Trading firm Tower Research Capital is muscling into the fast-growing business of running the plumbing behind bond funds in an attempt to seize market share from heavyweight incumbents such as Jane Street and Goldman Sachs.
Tower has expanded quickly to quote prices in more than 500 fixed-income exchange traded funds, up from just 30 nine months ago, according to people familiar with the matter.
It is seeking a role in all of the more than 1,000 US-listed fixed-income ETFs, holding a wide variety of debt instruments including corporate and government bonds.
In doing so, Tower is moving beyond its roots in equities trading to compete in a fast-growing sector that has ballooned since the global financial crisis to a market value of more than $3tn, offering a ripe opportunity for outfits that facilitate buying and selling the funds.
Tower declined to comment.
ETFs in general have proliferated in the past two decades as investors have flocked to them for the ease of trading listed vehicles. Fixed-income ETFs give access to assets that might otherwise be particularly hard to buy — many corporate debt instruments, for example, are offered through dealers and may have thinner supply than the same company’s equity shares.
Market makers such as Tower facilitate trading by buying and selling a fund’s underlying basket of securities, creating or redeeming ETF shares in the process.
Once strictly the domain of banks, proprietary trading groups such as Jane Street have moved into the plumbing behind ETFs to enormous success. That firm’s dominance in handling ETFs helped fuel its huge jump in revenues in recent years.
Traditional banks have struggled to keep up with the competition from proprietary trading firms, which have fewer regulatory hurdles and invest in advanced technology.
Even so, the fixed-income portion of the market has remained the purview of a few players because the underlying debt can be niche and hard to trade. Funds can hold a wide variety of assets such as securitised corporate loans and municipal and mortgage-backed bonds, spanning a huge and fragmented universe.
“It’s a scaled game to trade and price in a way that’s accurate and quick,” said Reggie Browne, principal and co-head of ETF market making at GTS, a trading firm. “The landscape is very competitive and broad.”
Tower has taken steps in recent years to broaden beyond its roots as a market maker in high-frequency trading of equities. It has also incorporated slower, so-called “mid-frequency” strategies that involve holding positions for days and weeks rather than seconds.
“As a market-maker, you’re always on the treadmill,” said Andrew Lekas, partner at Old Mission Capital, a quantitative trading firm. “If you’re doing the same thing you were doing 10 years ago, you’re out of business.”
Tower was founded in 1998 by Mark Gorton, a former fixed-income trader at Credit Suisse. He also launched LimeWire, the file-sharing service popular in the early 2000s.
An explosion in fixed-income ETFs was ignited after central banks around the world raised their policy interest rates to combat global inflation after the pandemic. Tightening monetary policy made the returns on bonds and loans attractive for the first time in decades.
Debt markets, which for years traded by voice, also underwent more electronification in the past two decades, making it easier to package debt instruments into ETFs.
More than 2,500 fixed-income ETFs are listed globally. Investors have piled a net $217bn this year into funds holding debt such as short-term US Treasuries and corporate bonds, according to data from Morningstar.
