Citi trades prompt MTS limits

The limits will be implemented through the automated MTS platform.

The restrictions, which are already in effect, limit dealers to sending no more than €1 billion ($1.24 billion) worth of orders or 20% of average daily volume calculated over the preceding 10 days in any given two-minute period — whichever is the greatest, said the source. The MTS board will review the changes on September 10.

The limit collectively applies to EuroMTS, MTS Austria, MTS Ireland and MTS Greece, the source said. The entire amount of the restriction applies to MTS Italy, while MTS Germany and MTS France are both restricted to €500 million ($620 million) or 20%. All other MTS markets are as yet unaffected, the source said.

Problems via Citigroup erupted just before midday on August 2, when Citigroup traders pushed through €11 billion ($13.6 billion) worth of sell orders in a period of just two minutes, according to sources familiar with the situation. The MTS platforms succeeded in handling the volume of order flow generated by Citigroup without causing disruptions to the price. All orders were submitted, executed, processed and settled according to market rules, said sources familiar with the situation.

However, prices began to move as soon as MTS market-makers, who had taken on the Citigroup orders, dipped into the derivatives markets to hedge their positions. Some market makers pulled their quotes from MTS as they realised futures markets no longer offered a perfect hedge. When quotes returned to the MTS cash markets, prices reflected the movement that had occurred in the futures markets. With prices now lower in the cash markets, Citigroup came back in with buy orders totalling €4 billion ($5 billion), closing out a portion of its position.

“On a regular day, swaps and futures would have been much more liquid and prevented such a large move,” said a government bond analyst.

Citigroup officials said the growth of electronic trading platforms for European government bonds has prompted significantly increased capacities in the European cash markets and Citigroup continues to provide liquidity on these platforms.

Sources added that Citigroup has not broken any rules in its recent behaviour.