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Citadel Goes Old School on Bonds After Electronic Gains

Chicago-based Citadel Securities is focusing on less-traded off-the-run Treasuries in 2017.

By Lisa Abramowicz

(Bloomberg Gadfly) --Citadel Securities has spent the past few years using a high-tech approach to grab business away from big Wall Street banks.

Now, Citadel Securities is trying something a little different -- a low-tech approach. The Chicago-based dealer wants to go after less-traded areas of the fixed-income market, which rely more on humans talking to one another than computerized marketplaces. Its main debt focus for 2017 is expanding into off-the-run Treasuries, or those that are older and traded less frequently.

The firm has already grown to become one of the top 10 Treasury market makers on Bloomberg LP's trading platform, according to Paul Hamill, the firm's global head of fixed income. It became a top dealer in credit-default swap indexes within just months of starting the business. Now it will start looking at less-liquid corners of the debt market. 

This is a "meaningful step" for the firm because this "is an area very heavily dominated by the banks," Hamill said in a Bloomberg Television interview on Thursday. "It is much more focused on relationship-driven trading." 

It is also more complicated and expensive. The more Citadel Securities spreads out into the idiosyncratic, less-standardized areas of fixed income, the more difficult it'll become to succeed. While these markets tend to be much more lucrative per trade, they also are more fraught. Traders with lots of relationships cost money. They usually need the help of analysts to make good decisions. They make mistakes, which can be especially problematic if traders use the firms' own money to make risky wagers. And as Hamill said Thursday, Citadel Securities carries inventory "that's the same size and competes with the kind of book that a global bank" has.Meanwhile, big investment banks have a more natural connection with many investors. While they've been put at more of a disadvantage in recent years because of stricter regulations, they still have regular contact with asset managers who rely on them to underwrite bonds. And even though banks have cut back their debt-trading units, they're still very much in the game.

This isn't Citadel Securities' first foray into making markets in less-liquid debt. Ken Griffin, founder of the Citadel LLC hedge fund, substantially expanded the securities firm in 2008 to include underwriting and trading in stocks, bonds and derivatives, among other services. It didn't fare so well, and in 2011 it was forced to slash its distressed-debt team, shut a research team and jettison investment bankers. It opted to return its focus to making markets electronically, which has been incredibly successful. Now it has to be careful that its grand ambitions to take Wall Street by storm don't undo its tremendous gains. Humans have a tendency to make things messy. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.


Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.
To contact the author of this story: Lisa Abramowicz in New York at [email protected] To contact the editor responsible for this story: Daniel Niemi at [email protected]

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