Citadel Builds Out Its Institutional Offering
Citadel is growing its institutional desk.
The firm is building out a low-touch electronic institutional business, Jamil Nazarali, senior managing director and head of Citadel Execution Services, told Traders Magazine during a recent interview.
“We are getting traction. The business is growing and doing well,” Nazarali said. “We already have two of the top 10 blue chip buyside asset managers trading with us, with others in the pipeline.”
The business has about a dozen traders and staff. At present, the institutional group operates under an agency-only model, doesn’t manually handle any order flow and doesn’t commit capital. It is strictly a low-touch electronic business whereby the buyside accesses and trades through Citadel algorithms on a self-service basis. Citadel does provide electronic sales trading help, however.
Nazarali said some Citadel clients have asked the firm to commit capital-especially on the tail end of an order that hasn’t been filled via an algorithm.
The firm is offering a handful of core algorithms to clients: VWAP, TWAP and POV. But it also offers more customizable liquidity-seeking algorithms called Mercury and Mercury Dark (for trading off-board). Nazarali said its growth strategy centers on the Mercury and Mercury Dark algorithms.
The initiative follows the wholesaler’s winter expansion of its over-the-counter desk. In May, Citadel hired four new market makers and a broker-dealer sales exec, further bulking up its trading business.
– John D’Antona Jr.
Future of Equity Volume Cloudy
U.S. equity trading volume has dropped 7 percent in the first five months of the year, positioning it as the fourth year in a row of decline. However, one exec thinks the slide could end soon.
For the five months through May, U.S. equity average daily volume was 6.34 billion shares, down 7 percent from the same period in 2012, according to data from Credit Suisse’s Trading Strategy Group.
The market isn’t going to get any help from investors leaving the bond market any time soon either, wrote Greenwich Associates in its latest report, “U.S. Equities: Five Reasons Why the Great Rotation Might Not Be So Great.” The shift out of domestic equities will continue and will keep pressure on trading volumes, despite the expected rotation out of fixed-income products as interest rates are expected to rise.
At about 6.3 billion shares, Q1 2013 daily trading volume in U.S. equities is down by a third from the 2009 market high of roughly 9.3 billion. It is not expected to bounce back much in 2013, Greenwich Associates consultant Jay Bennett told Traders Magazine.
Kissell Group, a consultancy, said it expects equity volumes to stay low into the second half of the year, especially if volatility remains low.
Despite mostly down numbers, one exec said the volume slump could be over. Speaking on CNBC, equities chief Timothy O’Hara said equity volumes “have really ended what had been a multiyear trend of pretty steady declines.” – John D’Antona Jr.
Direct Access Partners Shuts Down
Direct Access Partners has shut down.
The institutional brokerage stopped handling orders in late May, after its clearing firm, Goldman Sachs, stopped clearing its trades.
Goldman ceased doing business with the firm two weeks ago, shortly after the Securities and Exchange Commission charged four Direct Access employees with bribing Venezuelan officials for bond business, according to sources.
Without Goldman backstopping its trades, sources say, other firms would shy away from doing business with Direct Access to avoid counterparty risk.
Direct Access Partners chief executive Ben Chinea and head of equity trading Mike Shea would not comment for this article.
Goldman officials could not be reached for comment.
New York-based Direct Access Partners started out in 2002 as a New York Stock Exchange floor brokerage and grew rapidly over the years in both equities and fixed income. Sources tell Traders the firm has 130 employees.
Most recently, the firm hired a team of listed derivatives specialists from I.A. Englander. In 2009, Direct Access hired a team of equity traders from the institutional brokerage arm of defunct NYSE specialist Van Der Moolen Holding.
The trouble started on May 8, when the SEC charged four Direct Access employees with bribing a Venezuelan government official to win bond trading business with a Venezuelan state bank.
– Peter Chapman
More Prop Shops in Chicago
Proprietary trading shops are mushrooming in Chicago.
More and more firms specializing in options and foreign-exchange trading are setting up shop in the Windy City, according to a vendor who services them. Many are refugees from the big investment banks.
“It’s a burgeoning market for us,” said Fintan Quill, a senior engineer at Kx Systems. “And Chicago is an especially big focus.”
Quill explained that while a handful of firms have the money and wherewithal to compete on speed, many more don’t. This second tier is taking advantage of the move to electronic trading in options and foreign exchange by developing innovative trading strategies.
While the phenomenon is national, there is a preponderance of activity in Chicago, largely because the derivatives industry is already based there, Quill explained.
Most of the newcomers are non-broker-dealers and their staffs are no bigger than 100 people. Many have migrated from large banks that are purging themselves of their proprietary trading desks as new rules-such as the Volcker rule-come into effect.
Kx Systems, which sells technology used to process market data, has a large presence in the big banks, Quill said. So when a team of traders decides to start their own shop, they turn to Kx for their data needs. – Peter Chapman
Bigger Ticks for Smaller Stocks May Be on the Horizon
Reports coming out of Washington indicate the Securities and Exchange Commission and the nation’s stock exchanges are working together to produce a pilot that would increase the minimum trading increment for both less-liquid and lower-priced stocks.
The initiative comes after strong lobbying by the venture capital industry and a couple of fact-finding roundtables sponsored by the SEC. In addition, at least one bill has been introduced in Congress, with another possibly on the way.
In May, Rep. David Schweikert, R-Ariz.-the primary author of the JOBS Act, which was intended to make it easier for smaller companies to go public-introduced the Spread Pricing Liquidity Act. The bill would allow for ticks of a nickel and a dime, and would also prohibit maker-taker pricing on those issues.
As Traders Magazine was going to press, Rep. Sean Duffy, R-Wis., announced plans to introduce a similar bill titled Tick Size Flexibility Act of 2013. The bill would give so-called emerging growth companies-those with less than $1 billion in revenues-the choice of a nickel or dime tick, if they wanted their stock to trade in an increment greater than a penny, the current standard. – Peter Chapman
Stalemate Seen in Off-Board Quarrel
Recent comments by industry leaders indicate they are far from any deal to end the dispute between exchanges and brokers over the issue of internalization, or trading outside of the exchanges.
At a roundtable in May, organized by Rep. Scott Garrett, R-N.J., representatives from exchanges and brokerages discussed the possibility of lowering exchange fees in return for broker compliance with a so-called “trade-at” rule.
The goal would be to force brokers to fill their retail orders at better prices, while at the same time cutting their cost of doing business on exchanges. This could lead to more orders directed to exchanges, or better fills if done in-house.
Larry Leibowitz, NYSE Euronext’s chief operating officer, indicated he might be willing to cut the price of access in half-from 30 mils to 15 mils-if brokers agreed to the rule.
The trade-at rule, under consideration by the Securities and Exchange Commission, would require brokers to fill their orders at some “meaningful” price above the market’s best price. Leibowitz indicated a single tick, or a penny, would fit the bill.
At least one internalizer expressed little interest in accepting a trade-at rule-fee cut or no fee cut. “It would represent a systematic wealth transfer from long-term investors to professionals and market makers,” said Tom Matchett, UBS Securities’ head of retail market making, at the roundtable. Wholesalers such as UBS would be the biggest losers under any trade-at regime.
The offer was greeted with interest by one big internalizer. “I believe that a trade-at rule would work if combined with a large decrease in the fee,” Dan Mathisson, Credit Suisse’s head of U.S. execution and trading, said during the session. – Peter Chapman
Credit Suisse Joins Top 10 in Wholesaling
Credit Suisse Securities is barreling ahead in wholesale market making.
The institutional brokerage only entered the retail end of the equities business in late 2011, but is racking up big gains. During the first four months of this year, Credit Suisse executed more than 700 million shares on behalf of retail brokers, according to data from Thomson Transaction Analytics.
That compares with 95 million shares in the same period a year earlier, and places Credit Suisse among the 10 largest wholesalers. The data is derived from firms’ Rule 605 execution quality reports, which are mandated by the Securities and Exchange Commission.
Larry Birch, who spent two decades at wholesaler Bernard L. Madoff Investment Securities, is co-head of the new Credit Suisse operation. “I am calling on the relationships that I have built over the past 20 years,” Birch told Traders Magazine. “Our goal is to grow Credit Suisse’s retail presence and position ourselves as one of the top wholesale market-making destinations.” – Peter Chapman
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