Citadel Securities’ proposal to process trades for a swath of banks is taking shape behind the scenes, focusing on products across fixed-income markets.
More than 30 banks are engaged in talks — some more advanced than others — with billionaire Ken Griffin’s market-maker, hashing out an arrangement that would let them submit orders to the firm without revealing their clients’ identities. Citadel Securities is marketing the concept as a way for small- and mid-tier banks to provide better pricing on fixed-income trades. But it also would give it more insight and clout in markets.
“We’re creating an ecosystem,” Citadel Securities President Jim Esposito said in an interview, describing the project’s development in recent months. “If and when successful, you can envision a broader suite of products fitting into this ecosystem.”
The nascent concept to partner with banks — first reported by Bloomberg in July — has vast implications for Wall Street’s underlying mechanics and staffing. For banks struggling to keep up with industry leaders such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., which plow billions of dollars into recruiting talent and honing systems to compete on pricing, Citadel Securities is offering a way to continue serving clients and stay in the game.
Under the current proposal, banks could still process trades themselves or choose Citadel Securities, which expects pricing to continue improving as it scores a better view of market data and trends. That may help banks go toe-to-toe with larger competitors when vying for business. Firms could also mark up the price to make a profit.
“They have the option to set it up where they want it. And equally, they have the option to decide not to use it,” Esposito said. “It’s completely flexible.”
The firm’s friendly overtures may still meet skepticism in an industry that watched Citadel Securities use technology to disrupt old trading structures and usher in the no-fee era for retail investors. Working with brokerages including Charles Schwab Corp. and Robinhood Markets Inc., it now handles more than a third of all listed retail stock trades in the US.
Bank leaders have long braced for Citadel Securities to attempt to repeat that feat with institutional clients, whose transactions are more lucrative. Now, a bank might be able to bolster its franchise by partnering. Or if it decides to rely heavily on Citadel Securities’ systems, that could create leeway to trim staff.
Obscuring Clients
Citadel Securities is zeroing in on fixed-income operations, where the strongest banks have invested heavily in systems to consolidate market share. Its executives canvassed dozens of banks and smaller broker-dealers to discuss their pain-points and concerns.
Banks are highly protective of their client rosters. To defuse concerns that Citadel Securities might later swoop in on customers directly, the proposed system wouldn’t reveal their names. Instead, Citadel Securities is enlisting a third-party firm, TransFICC, that will install its technology at banks and brokerages while sparing them the cost to connect.
TransFICC’s systems would broadcast requests for quotes across banks, which could accept or decline prices they see. If banks choose the price from Citadel Securities, it would fill the order without knowing which client is on the other side.
Citadel Securities aims to start by offering banks pricing across US Treasuries, dollar, euro and sterling interest-rate swaps and US investment-grade corporate bonds. The firm could then expand to other markets, such as European government bonds, where it is already an active market-maker, executives said.
Fixed-income markets rely on both electronic and voice trading. The project would offer both, allowing banks to use a screen or the phone, if it’s a larger or more complex order they’re trying to fill.
‘Behind a Bank’
The proposal would also help some banks offer more trading services they wouldn’t otherwise provide — potentially enabling a firm to carry out a client’s trade outside their home market.
“The solution here is for us to be able to sit behind a bank, to be able to provide them with liquidity and competitive pricing that they can send back to their end-user,” said Amit Bhuchar, head of liquidity solutions for fixed-income, currencies and commodities at Citadel Securities. “What the partner chooses to do with their client is completely at their discretion.”
Though the system isn’t up and running with any bank yet, the firm aims to start operations later this year. Meanwhile, negotiations are continuing, and so is the work getting TransFICC’s quoting channel integrated.
TransFICC just raised $25 million in a Series B investment led by Citadel Securities, with participation from BlackFin Tech and existing investors, according to executives.
“It’s down to implementation now,” Bhuchar said.
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