Photographer: Tim Boyle/Bloomberg

The Biggest Fight in Treasuries Pits Citadel Against Citigroup

  • Dealers, high-speed traders submit letters on market structure
  • Data dissemination is key question in U.S. officials' review

Forget bulls against bears: There’s a bigger fight in the world’s benchmark bond market, and it’s all about data.

In the past two months, the U.S. Treasury Department has received 51 letters from banks, traders, fund managers, trade groups and academics as part of its review of the structure of the $13.4 trillion market for the nation’s debt. All were jockeying to inform -- and often, influence -- regulators working out how to best supervise the market.

A critical point of contention is whether the public should be able to access trading data, such as the size, price and time of various transactions. The debate pits the world’s biggest banks, such as Citigroup Inc., against a host of high-speed trading firms, including Citadel Securities LLC and KCG Holdings Inc., which are looking for a bigger share of the $500 billion-per-day Treasuries market.

Wall Street banks and large investors say they may have a tougher time trading if the figures are reported publicly. On the other side, high-speed traders say releasing more data would increase the market’s efficiency and reduce investors’ trading costs. Regulators have yet to decide, after the Treasury requested the input as part of its first survey of the market’s structure since 1998.

The Controversy

The topic may seem arcane, but it taps a deep vein of controversy. With access to more post-trade data, high-speed competitors may find it easier to challenge traditional bond dealers. Automated trading firms are already gaining a bigger foothold as balance-sheet restrictions make it less profitable for banks to trade Treasuries.

A letter posted April 29 from KCG -- one of two automated trading firms on the committee that helps advise the government on debt management -- said transparency “is the most critical issue facing the U.S. Treasury market.”

In stocks, derivatives and corporate debt markets, the size and price of many trades are reported publicly within minutes. There’s no comparable disclosure in Treasuries, which help determine prices for trillions of dollars of global assets, including rates on mortgages.

2014 Trigger

The lack of transparency became a problem after the Oct. 15, 2014, event known as the “flash rally,” when yields plunged 0.16 percentage point and then rebounded in just 12 minutes. Regulators seeking to determine the cause had trouble compiling any trading data from that day.

“We don’t actually have post-trade reporting that’s available to any regulator on a routine basis in the cash Treasury market,” Federal Reserve Governor Jerome Powell said at an April Senate subcommittee hearing. “So doing the analysis to deal with one 12-minute trade event took almost a year.”

Both banks and high-speed trading firms said in their letters that brokers and trading platforms should -- at the very least -- provide trading data to regulators upon request. The Investment Company Institute, an asset-management trade group, and trading platforms such as Nasdaq Inc. said regulators should regularly collect some types of trading information to supervise market activity.

“The case for full and immediate data transparency to regulators and increased public transparency of venue operating guidelines is abundantly clear,” wrote Joan Conley, senior vice president for Nasdaq.

Dealer Warnings

That’s where the agreement ends. Citigroup and several other bond dealers opposed broad dissemination of trade information in their letters. The lender said public trading data may make it tough for banks to assume large amounts of risk on behalf of their clients, and raise the risk that transactions in U.S. debt -- particularly older debt that changes hands less frequently -- would move the market.

As a result of post-trade reporting, “ultimately the client base might need to transact more often and in smaller size, which might impair the resiliency and the depth of the overall market,” Deirdre Dunn, head of North America G-10 rates at New York-based Citigroup, said in a phone interview.

A pair of securities-industry trade groups wrote in a joint letter that banks may have a tougher time managing risk around Treasury auctions as a result of public reporting. The letter from the Securities Industry and Financial Markets Association and American Bankers Association also said the public can already access prevailing yields of benchmark securities, which allows market participants to trade in a “competitive, fair and efficient manner.”

Bond-fund managers at firms like Prudential Fixed Income and Guggenheim Partners wrote that public trading data may hinder their ability to buy and sell U.S. debt. Platforms such as ICAP Plc said that

“If a trade will be disseminated to the market, dealers will be less willing to show a competitive price for that particular trade,” Erik Schiller, a portfolio manager with Prudential in Newark, New Jersey, wrote in the company’s letter.

Schiller wasn’t immediately available for further comment. Representatives from Guggenheim and KCG didn’t immediately respond to requests for comment.

High-Speed Support

Releasing more data may actually give investors a bargaining chip to win better execution from their trading partners, according to Citadel. In November, the firm was the first of its kind to start trading Treasuries with investors on a platform run by Bloomberg News parent Bloomberg LP. The automated trading arm of Ken Griffin’s Chicago-based hedge fund said more data may raise confidence in the market and give dealers more incentive to provide better prices to clients.

“It provides better insights into execution quality and permits more rigorous transaction cost analysis,” Stephen Berger, director of government and regulatory policy at Citadel, said in a phone interview.

Slow Down

To address potential investor concern about large trades moving markets, officials could add reporting delays for those transactions and for older securities, Berger said. Citadel recommended that regulators wait 15 minutes before reporting large transactions and from 15 to 30 minutes for old securities. In the case that regulators do implement post-trade reporting, Citigroup also recommends delays for old and less liquid securities, as well as for large trades.

“There are legitimate concerns, but many examples currently exist of post-trade transparency regimes that successfully balance concerns around transparency with liquidity provision,” Berger said. “You can maximize the benefits.”

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