BNPP targets US equities in new tie-up with GTS

French bank says derivatives business will benefit from better prices and liquidity in underlying stocks

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BNP Paribas is aiming to boost its share of trading in US stocks – and support its derivatives business – by partnering with GTS, the largest market-maker on the New York Stock Exchange.

The partnership is modelled on an existing tie-up between the two firms in the US Treasury market, which has seen the French bank’s market share leap from 1.5% to 4% in less than a year.

In the equities deal, GTS will stream prices in stocks and exchange-traded funds to BNP Paribas, which can use those prices when filling client orders. BNP Paribas will also use the GTS stream when delta-hedging its equity derivatives business.

“Our belief is that by enhancing the underlying liquidity it will benefit all our product offerings – structured products, options, delta one, and the underlying offer as well. This will enhance our competitiveness, consistency, and of course will help us increase growth in the US,” says Adil El Batji, head of e-trading, e-commerce and digital for the Americas at BNP Paribas in New York.

The firms will sign a memorandum of understanding today (November 15), but trading is not expected to start until next year and no growth target has yet been set, says El Batji.

BNP Paribas and GTS decline to comment on how the deal is structured from a commercial perspective, but say the US Treasury partnership has been profitable.

“The partnership is working as planned commercially, and the teams collaborating on this at GTS and BNP Paribas are enjoying the experience, which is important – we’re doing something that has never been done before,” says Ari Rubenstein, co-founder and chief executive of GTS in New York.

The partnership is the latest evidence of converging business models among bank market-makers and principal trading firms (PTFs). Facing intense cost and return pressures, banks are trying to run their flow trading businesses in a more efficient way, aping the technology and data-driven approach that has always characterised the PTF sector.

Meanwhile, many PTFs are getting into the business of providing liquidity directly to clients – the traditional bank market-making model – arguing they can provide better prices to a consumer of liquidity than to participants in an anonymous central limit order book, many of which will be rival PTFs.

In a number of cases, banks and non-banks have tried to capitalise on the emerging strategic synergy. In 2014, Credit Suisse and Tower Research Capital launched a joint venture to trade US Treasuries, while JP Morgan and Virtu Financial agreed to work together in the same market in 2016. Other partnerships – and different models – are also said to exist, but have not been announced publicly.

If we enhance liquidity in the hedging market, then we can improve swaps pricing as well
Adil El Batji, BNP Paribas

Part of the premise for these tie-ups is the argument that PTFs can often quote tighter prices than their bank counterparts, and the growing US Treasury market share at BNP Paribas seems to bear this out.

The French bank says its ability to access better prices in bonds has had knock-on benefits for clients trading derivatives products.

“They either benefit directly, because they are trading US Treasuries, or indirectly because the hedging instrument for swaps will often be US Treasuries. If we enhance liquidity in the hedging market, then we can improve swaps pricing as well,” says El Batji.

The challenge will now be to replicate that success in equities.

GTS makes markets in 165 members of the S&P 500 index, and has 35% of all trading in NYSE stocks. Rubenstein, though, highlights a different metric when explaining the thinking behind the partnership.

“One way of measuring whether we’re delivering on our mission is to look at the quality of the liquidity we’re providing. On NYSE, GTS is the number one market-maker in terms of price improvement – the percentage of liquidity that is beating the national best bid or offer in that security. We have pretty stiff competition in that market, so we’re very proud of that,” he says.

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