Citadel Looms Large as a Future Fed Primary Dealer

(Bloomberg Opinion) -- The bond market’s most elite club added a new member this week. Just not the one that’s loomed large over Wall Street for years.

Amherst Pierpont Securities became the first firm in more than three years to be added to the list of U.S. primary dealers, a group that transacts directly with the Federal Reserve Bank of New York as it carries out monetary policy. The designation has long been considered a badge of honor, though the benefits have diminished in the post-crisis era as a small pool of banks dominate trading and dealers need not purchase large swaths of Treasury auctions. Primary dealers are required to bid for at least their pro rata share of the total amount of debt the U.S. issues. 

With all due respect to Amherst Pierpont, though, it’s no Citadel LLC. 

Citadel Securities, the market-maker founded by billionaire Ken Griffin, has been clear for a long time about its ambitions to one day join the ranks of primary dealers. The public push began in November 2016, after the New York Fed updated its primary-dealer requirements to try to expand the group of eligible firms. Since then, it has launched headfirst into broadening its activities in the $15.9 trillion Treasuries market. In June 2017, it began making markets in older U.S. debt, making it virtually alone in wading into the investor-to-dealer segment.

This is what Paul Hamill, global head of fixed income, currencies and commodities at Chicago-based Citadel Securities, told Bloomberg News’s Liz Capo McCormick at the time:

“You can’t hope to be fully relevant in Treasuries to a global client base – whether it is Japanese mega-banks, sovereign wealth funds, domestic asset managers or hedge funds, without being involved in the entire complex of securities.”

“We have some work to do in building out our Treasuries product set. And once we achieve a level consistent with a primary dealer, then we can think about the application process.”

Fast forward one year, to June 2018, and Hamill had a firmer date in mind to achieve primary-dealer status: 2020.

McCormick reported at that time that Citadel Securities would ramp up dealings in short-term bills, Treasury Inflation Protected Securities, and Strips (notes and bonds split into principal- and interest-only securities). “Becoming a primary dealer is not a means to an end for us,” Hamill said. “But it will be a natural thing for us to do once we have the entire suite of Treasury products. We’d be very proud to call ourselves a primary dealer, there is no question about it.”

To longtime watchers of the primary dealer space, though, it’s hardly natural at all, given that Citadel Securities is merely 17-years-old. Amherst Pierpont, which traces its roots back to 1993, fits the bill of a traditional entrant into the group: It’s a fixed-income broker dealer, created in 2014 as a combination of Pierpont Securities LLC and Amherst Securities Group. On its website, the “Our Capabilities” page touts trading in investment-grade corporate bonds, structured products, mortgage-backed securities and all the U.S. rates offerings that Citadel Securities is still building up. Sure, it’s a smaller player than the likes of Citigroup Global Markets Inc., Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, but it’s probably about what the New York Fed envisioned when it cut its minimum net-regulatory capital for dealers back in 2016.

Citadel Looms Large as a Future Fed Primary Dealer

Citadel Securities, on the other hand, is aiming to become “one of the top market makers in the world in dollar rates products,” and by all accounts has the wherewithal to do so. The inner workings of the world’s biggest bond market are consistently changing because of regulations and new technology, leaving open the possibility that high-speed proprietary traders will play an ever-increasing role. Remember that not too long ago, Credit Agricole SA had the chance to become a primary dealer, but reportedly decided it just wasn’t worth it.

Amherst Pierpont clearly thought it was. Congratulations to the firm for becoming the first to earn the designation since requirements changed. Perhaps the move will encourage more of its peers to follow suit. But as far as watershed moments go for the Treasury market, it still feels like Citadel Securities is the one to watch.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

©2019 Bloomberg L.P.