Hedge funds rival banks for share of US Treasury market
By Richard Beales in New Yorkand Gillian Tett in London
Published: March 9 2007 02:00 | Last updated: March 9 2007 02:00
Big hedge funds have recently grabbed such a large share of trading in US Treasury bonds that their activity is eclipsing many of the investment banks that have traditionally dominated the market.
Citadel, the Chicago-based fund, is now estimated to account for more than 10 per cent of trading in the most liquid Treasuries, according to market participants with knowledge of the fund’s activity.
The surge in the significance of hedge funds has arisen partly because Citadel and others are increasingly using computer-driven trading models that make trades very frequently to exploit tiny differences in prices, generating high volume.
The shift indicates the degree to which the arrival of such electronic trading is reshaping financial markets. It also underlines the extent to which hedge funds have muscled in on territory that was once the preserve of the banks – a trend that could undercut the revenues banks make by acting as intermediaries.
This has fuelled unease among banks about requests the hedge funds are making to become direct participants in the eurozone government bond market.
“Hedge funds have now become huge players in the US Treasuries market,” said Benn Steil, an academic who works at the Council for Foreign Relations. “Once hedge funds start accounting for this much of the market, it is hard to know what to call them – they are not really bank customers any more.”
It is difficult to calculate accurately the proportion of the market represented by hedge funds since they do not release figures on their trading flows.
The two platforms that dominate electronic trading in liquid Treasuries – BrokerTec and eSpeed – are reluctant to discuss individual clients’ activity.
However, in recent months, Citadel and other funds have offered some data to financiers in Europe because they are seeking to join MTS, the dominant platform for trading eurozone government bonds, whose membership is limited to banks.
In the Treasury market, hedge funds and other big users are connected to “inter-dealer” trading systems managed by eSpeed and BrokerTec, a unit of Icap.
The data suggest that Citadel accounts for at least 10 per cent of trading flows on eSpeed and BrokerTec, which in turn are believed to account for about two-thirds of trading flows in the most frequently traded Treasury instruments – estimated at about $300bn (£155bn) a day.
Citadel declined to comment.
However, in disclosures made late last year, the fund revealed holdings of more than $30bn of government bonds.
Copyright The Financial Times Limited 2007
