JPMorgan to Use Computerized Trader’s Technology for Bonds

  • Three-year deal is for the dealer-to-dealer Treasury market
  • Virtu is one of the world’s biggest electronic trading firms

JPMorgan Chase & Co. will use a computerized trading firm’s technology to access and trade in the U.S. Treasury market, marking a further step in the transformation of markets by electronic specialists.

The New York bank is partnering with Virtu Financial Inc., one of the biggest electronic trading companies, according to a statement on Wednesday. The agreement, which lasts at least three years, allows JPMorgan to use Virtu’s technology in the dealer-to-dealer market.

“We’ve really opened up the kimono to show them how we operate,” Virtu Chief Executive Officer Douglas Cifu said on an earnings call with analysts. “There’s buy-in on both sides to try and make this work and expand beyond U.S. Treasuries.”

Electronic trading firms with cutting-edge technology now play a vital role in markets, and they’ve also encroached on banks’ turf. Another company, XTX Markets Ltd., recently jumped into the top ranks of currency traders, traditionally an exclusive club for Wall Street dealers.

Virtu has held preliminary talks with other financial institutions about similar potential deals, Cifu said on the call. While its partnership with JPMorgan is unlikely to bring in significant revenue in the near future, the firm expects it to pay off in the long run, he said.

‘A Validation’

“The agreement is a validation of Virtu’s technology and its ability to leverage it with large commercial players and potentially across asset classes (and perhaps geographies),” Rich Repetto, an analyst at Sandler O’Neill & Partners LP, wrote in a note.

The deal pairs Virtu, a firm less than 10 years old that employs 150 people, with one of the oldest U.S. financial institutions, a company that employs more than 235,000. JPMorgan already had a close relationship with Virtu, Cifu said on the call. The bank chose the electronic trading firm to oversee trading of its stock on the floor of the New York Stock Exchange earlier this year.

“We are committed to staying a leader in fixed income,” said Brian Marchiony, a spokesman for JPMorgan. “Working with outside firms is complementary to our internal investments and ensures that we are evaluating innovative technologies as the markets evolve.”

The JPMorgan partnership signals that Virtu is diversifying as the high-speed trading industry matures.

“While likely to take some time, these relationships can have very high incremental margins and more importantly, highlight that there is more to VIRT’s growth profile than better global volumes and volatility,” wrote Warren Gardiner, an analyst at Evercore ISI, in a note.

Virtu is connected to more than 235 markets in 36 countries, and it trades in more than 12,000 financial instruments. In the second quarter, Virtu began providing order-routing services and post-trade analysis to institutional investors. Virtu is signing up more U.S. fund managers and plans to make the service available in Europe too.

On July 5, Virtu said it bought a minority stake in SBI Japannext Co., a Tokyo-based proprietary trader.

Virtu’s net trading income from American equities rose 13 percent to $31 million in the three months that ended June 30, compared with a year earlier. Income from fixed income, options and other assets increased 75 percent to $8.3 million, while the firm’s profit from global currencies fell 32 percent to $17 million.

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