No Comment, They Said

63% of all US Treasury bond trading is handled by 5 Chicago HFT firms, according to Bloomberg. Given the rise in futures open interest, I feel the number is low. Unlike Solomon Brothers of old, these firms combine speedy technology with a post- crisis "franchising" of the product. The "liquidity cartel", as I call them, are comprised of DRW, Jump, Teza, Citadel and XR Trading-Securities-Technology..whatever the suffix.

Interestingly, only the head of FI for Citadel would even make a basic comment to Bloomberg on the groups rising control of the treasury market. "Spokespeople" for DRW, Teza and Jump are earning big bucks answering inquiries with a pat, "No comment." I fully support the idea of privacy behind these non-public firms. The fact that the majority of trading in the most important security in the world is controlled by 5 private algorithms, I'm a little less supportive of.

Markets evolve and technology has fundamentally changed how individuals and institutions interact with price. My anecdotal observation is a consequence of that evolution has been a reduction in engagement when prices "get loose." A characteristic of the charcoal on cave wall days of open outcry was the increase in engagement in times of trouble and a larger pool of participants.

Treasuries remain the envy of the world. Their paltry positive yields are a glaring anomaly to the negative mess in Europe. Someday, prices will decline. The taper tantrum was a tremor, not "the big one" as they say out here on the Left Coast. All we can do is hope the Liquidity Cartel shows up for work that day. When they don't, and everyone wants an explanation for the carnage, "No comment" isn't going to cut it.

5 thoughts on “No Comment, They Said

  1. Pingback: 10/30/15 – Friday’s Interest-ing Reads | Compound Interest-ing!

  2. Shrek

    The whole market has liquidity issues. Look at August 24. How does JPM swing up and down 5 dollars for over an hour at the open. it may not be HFt, but its worth asking whether having a group of homogenous style liquidity providers is having a detrimental effect.

  3. simon

    The whole purpose of the market is to spread risk, not concentrate it into a reducing pool of participants. Working in the industry I can see the effects this is having daily and in my humble opinion it doesn’t offer long term benefit.

  4. Mike

    Don’t be so hasty to call the concentration of liquidity providing a bad thing or unfair. There are no intrinsic barriers to entry besides capital and brains, which is the same deal in the hamburger, toothpaste, and software businesses. There is nothing unfair about it.

    Liquidity crisis existed before HFT as well. Nothing has changed there in the futures markets. Complaints about firms pulling quotes instead of willingly going out of business when the world wants out are disingenuous. The larger pool of participants you refer to did not prevent liquidity events either.

    Disclaimer: I don’t work at a large bond trading firm.


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