- As dealers curb risk, internalize trades, HFT sway grows
- Windy City rivals Wall Street as destination for bond jobs
Chicago is challenging New York’s long-held position at the center of what’s been called the world’s most important financial market.
When it comes to the $12.9 trillion of U.S. Treasuries outstanding, Windy City firms such as Jump Trading LLC, Citadel Securities LLC, Teza Technologies LLC, XR Trading LLC and DRW Trading Group have ridden expertise in high-frequency, computer-driven algorithms to dominate trading between dealers. Wall Street’s influence has waned in that area as rules enacted since the credit crisis to make the financial system safer led them to curb risk-taking and handle more transactions within their own walls.
"Everybody always perceived that bond trading always took place in New York," said Jim Bianco, president of Bianco Research LLC in Chicago. “Who knew that Chicago was the center of the universe for Treasury trading? The ground is shifting in Treasury trading toward high-frequency trading and algorithmic trading. The trader is a computer."
Chicago’s emergence as a leader in bond trading didn’t happen overnight. The third-most-populous U.S. city is home to CME Group Inc., the world’s biggest futures market, where some of the earliest adopters of electronic trading were based.
There’s a shift afoot on the part of fixed-income investors that plays to the strength of the Chicago-based traders and their New York high-frequency counterparts. With Wall Street pulling back from marketmaking, asset managers have turned to derivatives, including futures, to find the liquidity they need to hedge.
Open interest on 10-year Treasury futures has risen to almost 2.8 million contracts, representing a $280 billion value, from about 1.7 million contracts three years ago, according to data compiled by Bloomberg. Meanwhile, primary dealers’ daily trading of Treasuries has averaged $492 billion this year, below the five-year average of $532 billion, according to data from the Federal Reserve Bank of New York.
In the 1990s, Chicago traders started companies that used electronic systems to profit off price discrepancies in different markets, including those for cash Treasuries and futures. Those traders were among founders of Chicago ultrafast firms active in Treasuries.
Their growing clout is playing out in the market for Treasuries trading between dealers.
On the two largest interdealer platforms -- Icap Plc’s BrokerTec, and Nasdaq OMX Group Inc.’s eSpeed -- non-bank traders occupy eight of the top 10 spots in terms of volume, with Wall Street primary dealers making up the balance, research firm Greenwich Associates said in a report released this month.
Chicago-based companies deploying high-frequency technology captured at least 63 percent of trading in May-June on BrokerTec, the largest interdealer system, according to data from Risk.net. Proprietary-trading firms in New York and New Jersey, including KCG Holdings Inc., accounted for at least 17 percent, and New York-based primary dealers 14 percent.
“It’s no secret that some Wall Street banks have been slower to invest in electronic market-making technology as fixed-income markets have become more electronic,” although a few are moving to close that gap, said Paul Hamill, global head of fixed-income, currencies and commodities in Chicago at Citadel Securities, which also makes markets for investors.
“There are a large number of firms in Chicago in the futures and options markets that already have technology in their DNA given the electronic nature of these markets,” he said.
Carissa Felger, a spokeswoman for Jump Trading, declined to comment, as did Brian Maddox for Teza Technologies, Jessica Iverson from DRW and Sophie Sohn at Jersey City, New Jersey-based KCG, a market maker that also uses high-frequency trading.
The interdealer systems don’t capture all of Wall Street market-makers’ business, because they’re bringing Treasuries dealing internally and doing more electronically. The banks control the client-to-dealer business, where they handle orders from money managers, an area that’s closed to nonbank trading firms. The top five primary dealers handle 60 percent of trading done by U.S.-based Treasuries investors, up from 44 percent in 2005, according to Greenwich.
Yet there’s no disputing the influence of proprietary trading firms -- in both Chicago and New York -- on the interdealer platforms that Wall Street marketmakers have used historically to hedge and transact with each other.
Their rise is a double-edged sword. Securities and Exchange Commission Chair Mary Jo White said last week regulators should consider ramping up oversight of the platforms where Treasuries are traded and try to curb orders to buy and sell that can disrupt markets. Regulators from the Federal Reserve to the Treasury Department have said high-speed traders may have exacerbated the kind of volatility seen in the U.S. government bond market on Oct. 15, 2014. At the same time, their involvement can also help keep the market liquid and tighten spreads.
“I believe in technology providing efficiencies to any marketplace,” said Matt Haraburda, president of XR Trading, a proprietary-trading firm in Chicago. “I see that trend continuing."
Ilya Talman, a Chicago-based recruiter who’s been filling jobs in finance for 33 years, has a first-hand view of the sway of high-speed traders. The founder of Roy Talman & Associates, which also recruits in New York, is finding fixed-income candidates are just as eager to work in the Windy City as on Wall Street.
Case in point: one of Talman’s latest clients, an engineering Ph.D in his 30s who’s looking for a new post after about three years at a Chicago-based high-frequency firm that trades Treasuries. As Talman tells it, the candidate is interviewing with firms in Chicago and New York, but prefers to stay in Chicago because the opportunities are just as good.
For U.S. traders with about five years experience in government bonds, annual salaries may average about $500,000, including bonus, whether they’re at Chicago proprietary firms, a similar company in New York or a Wall Street bank, according to data from Options Group, a recruiting company in New York.
For aspiring bond traders, “there’s no perceived penalty" for not being on Wall Street, Talman said.