A confidential list of the top 10 firms by volume on BrokerTec reveals the extent of high-frequency trading (HFT) in the Icap-owned interdealer market for US Treasuries – data that is not shared with participants on the platform.
The list – obtained by Risk – shows eight of the top 10 firms ranked by volume on BrokerTec over May and June were non-banks, with a big contingent of HFT specialists. These firms racked up trades with a notional volume of almost $7 trillion during the period, or 85% of the volume executed by the top 10 firms, data that one market-maker calls "astonishing".
Topping the list (see below) are three Chicago-based firms – Jump Trading, Citadel Securities and Teza Technologies – which between them accounted for 51% of the volume executed by the top 10 firms.
Only two banks made the list: JP Morgan, which ranked fifth with 8% of the volume; and Barclays in eighth place with 6%. The two banks together generated roughly half the volume of Jump Trading, which had a 28% market share.
Other non-banks on the list include New Jersey-based KCG and Chicago-based DRW Trading. Lower-profile firms also appear, such as Spire-X, an affiliate of New York-based Tower Research Capital, and Rigel Cove, which is thought to be an offshoot of New York-based Hudson River Trading.
That list is astonishing. Other markets have a much greater mix of banks and non-banks
Icap disputes the accuracy of the data, saying the numbers overstate the trading volumes and the share belonging to non-banks.
BrokerTec participants are told how much volume they executed on the platform, but not what share of the market they represent - making it difficult to independently confirm the list's ranking of participants. The precise period of trading covered by the list is also unclear. Risk shared the data with three participants on the platform - including each firm's own volume, which the firms verified. One said the numbers slightly understated its trading during May and June.
The identities of the top 10 firms were also reviewed by sources familiar with BrokerTec's business, including current and former clients and employees.
The outsize footprint of non-banks in the interdealer markets is an open secret in the industry – a fact highlighted in the official report on last October's violent intraday swing in US Treasury yields, released on July 13. "The growth in high-speed electronic trading has contributed to the growing presence of principal trading firms in Treasury markets, with these firms now accounting for the majority of market depth. By contrast, bank-dealer activity in the 'interdealer' market now accounts for well under half of the trading and quoting activity," the report said.
The BrokerTec client list sheds new light on the extent to which trading activity in the interdealer Treasury market is concentrated with a handful of non-bank firms.
"That list is astonishing," says an executive at a non-bank market-making firm in London. "Other markets have a much greater mix of banks and non-banks."
"My guess is that 90% of the volume is done by the top 10 firms," says the head of electronic rates trading at a bank in New York. "It is a highly surprising fact that the US Treasury market is the biggest market in the world in notional terms, and yet only 10% of the volume is transacted outside the top 10."
BrokerTec is the largest of the two main venues for interdealer trading in on-the-run US Treasuries. Market participants estimate BrokerTec represents 65–70% of interdealer market volumes, with Nasdaq-owned eSpeed accounting for 30% of the market and Dealerweb making up the remainder.
BrokerTec and eSpeed are said to have a similar client base.
The participants on these platforms and their respective market shares have changed markedly over the past decade, participants say.
"In 2004, there were only a couple of non-banks that mattered. By 2006, you also had Getco and Citadel, with the latter having a few different waves of success. By the end of that year, you already had three of those firms in the top 10," says a source close to Icap.
Non-bank volumes on BrokerTec are said to have more than doubled since 2012 when the firm made changes to its matching engine to accommodate high-frequency trading strategies.
Isaac Chang, global head of fixed income at KCG, points to other forces that are reshaping the interdealer markets for US Treasuries. "There are two large secular trends that are affecting the participation of banks on these platforms. First, even though the Volcker rule doesn't explicitly affect the US Treasury market, banks generally have been de-risking. Second, the largest dealers that have the most sophisticated technology now realise that they should be internalising as much flow as possible," he says.
Joseph Noviello, senior vice-president for US fixed income at eSpeed in New York, says many of the people at the non-banks now active in the US Treasury market are former bank employees.
"As banks have stepped away from prop trading because of the capital implications, professional traders that we have dealt with for years have left and started their own small shops. So they're not banks, but developing broker-dealers, and they have been in the eSpeed family of customers for a decade. They just no longer work at a bank," he says.
The lines separating traditional dealers and non-banks in the fixed-income markets are also blurring. Citadel started quoting US Treasuries on Bloomberg's dealer-to-client platform last week and has been an active market-maker in interest rate swaps since October 2014. Citadel and Teza are also active in the interdealer swap market.
Icap disputed the accuracy of the BrokerTec data obtained by Risk. "The client figures given by Risk are overstated – our professional trading customers are an important part of BrokerTec, but the estimates are wrong in percentage and number. Moreover, we do not comment on individual customers," a spokesperson for the firm wrote in an email.
BrokerTec does not disclose the identities or volumes of its market participants to the public or even its clients. Instead, firms active on BrokerTec are informed of their trade volumes – but not those of their competitors – at the end of each month. This data is said to be spotty. Sources told Risk that the month-end data provided by BrokerTec often does not match their internal figures.
There is a discrepancy between the market volumes implied by the list and those disclosed by the platform. BrokerTec reported average daily volumes of $184.2 billion in May and $188.9 billion in June. Multiplying the average daily volumes by the number of trading days in those months – 21 in May and 22 in June – implies the platform saw $8.024 trillion of total volume over that period. The data obtained by Risk shows the top 10 firms on BrokerTec executed $8.049 trillion in combined volume over that period – or $25 billion more than the volume derived from the daily averages. The discrepancy could be the result of rounding or the volumes on the list may not run precisely from the start of May to the end of June.
"BrokerTec is focused on delivering the deepest liquidity in the market. Both banks and non-banks are key participants and contribute to the market's overall depth and robustness, and we are focused on encouraging healthy liquidity and behaviours for all our customers," the Icap spokesperson said.
An in-depth feature on the role of non-bank trading firms in the US Treasury market will appear in the October issue of Risk. The article will be available online next week.
The week on Risk.net, May 12-18, 2018Receive this by email