Rates flow market-maker of the year: Citadel Securities

In the world of US Treasuries, Citadel Securities is beginning to look more and more like a bank. It might not have the breadth of service, depth of coverage or product range that big banks tend to provide for their customers, but over the past 12 months the broker-dealer has grown its client base, expanded coverage and risen to the top of the counterparty list for many central banks across Europe.

In 2019, the firm built out a market-making offering in US Treasury bills and short coupons, with ‘Strips’ to come shortly. It has also expanded its client footprint across the fixed income, currencies and commodities franchise from 750 in 2017 – when Citadel last won this award – to 1,200 this year.

“Once you feel you have a really good product, almost like any commercial enterprise, you want to make sure you’re distributing it to maximum capability,” says Paul Hamill, global head of FICC distribution at Citadel Securities.

A core focus for 2019 was Europe, where the firm expanded its market-making capabilities with a broad range of counterparties. Risk traded roughly tripled between the first half of 2018 and the first half of 2019 among institutions including banks, broker-dealers, hedge funds and real-money accounts. This rise was propagated by a surge in trading volume with ‘official’ institutions – primarily central banks across Europe.

Citadel Securities now trades US Treasuries with 20 central banks in the region and has become a top three counterparty with a number of them.

“I think one important factor is that many of the firms we compete with are becoming less global, and they’re becoming more region specific in what they do. And if you’re a very large counterparty in US Treasuries, for example, it’s an advantage to trade with someone like us that has a global franchise and plays an important part in the global ecosystem,” says Hamill.

One of the key components for becoming a counterparty to central banks is an investment-grade credit rating. Citadel Securities’ European entity achieved this in December 2018, when Standard & Poor’s and Moody’s awarded ratings of BBB/A-2 and Baa3, respectively.

“That’s one of the things we’re proudest of, because if you can access a large new segment of flow that’s very, very important and strategic to the product you’re trading; that has a lot of positive knock-on benefits to your existing client base,” says Hamill.

“For large, well-covered central banks to want to do business with our firm, I think that suggests we have a strength of quality in the product, the coverage, the people, that makes them interested enough to want to help sponsor us through their on-boarding process,” he adds.

Once you feel you have a really good product, almost like any commercial enterprise, you want to make sure you’re distributing it to maximum capability

Paul Hamill, Citadel Securities

Another key tenet in expanding coverage to central banks was the build-out of the front-end rates business, such as Treasury bills and short coupons. Citadel says it has a 38% hit rate in these products, as well as at least 35% across the rest of the curve out to 30 years.

“The European central banking community is a big consumer of bills and front-end Treasury product,” says Hamill. “We have naturally grown first and largest in the US with the domestic market here, and clearly there is an opportunity to build on that and grow more globally.”

Establishing relationships with important institutions does not happen overnight. The work has taken years and relied on Citadel remaining a credible counterparty in US Treasuries, rather than just a ‘flash in the pan’ operation. So while the credit rating and expanded product list is important and has cracked open the door, the broker-dealer’s continued investment in its FICC business has also been key.

This is evident in the firm’s recent hires. In September, 2018, Citadel hired Carl Scott as head of FICC trading. A multi-decade veteran, Scott joined from Citigroup, where he was global head of non-linear rates and inflation. Citadel brought in 20 people in 2019 across the FICC business, with roughly half based in London and focused on the European build-out.

The expansion has helped the firm build its business in more esoteric, off-the-run US Treasuries, which require capabilities above and beyond core electronic market-making – a traditional strength at Citadel. In on-the-run trades, where the firm might be placed in competition with five banks, clients consider a range of factors such as speed of response, tightness of spread and consistency. One-off, off-the-run trades require a different skill set altogether.

“When it comes to that trade that may be just going to one person over the phone, like a large trade or an off-the-run trade, there’s an even greater emphasis on trust, relationships, and the ability to manage risk,” says Hamill.