Reuters
Traders work on the floor at the NYSE in New York
- GTS, a market maker in several asset classes, has plans to expand into US corporate bond trading.
- Corporate bonds represent a natural hedge for the trading GTS is already doing in exchange-traded funds.
- However, trading corporate bonds is not foolproof, as the markets have significantly less data than markets HFTs typically trade in.
- Click here for more BI Prime stories.
One of Wall Street's most sophisticated high-frequency trading firms plans to leverage a recent acquisition to expand into the rapidly evolving corporate bond market.
Global Trading Systems views corporate bonds as the natural next step for its business thanks to its recent completed acquisition of Cantor Fitzgerald's exchange-traded fund business, which closed in May. Ari Rubenstein, CEO and cofounder of GTS, told Business Insider he's extremely enthusiastic about the work his firm can do in ETFs, corporate bonds, and wholesale market making, another business GTS also acquired from Cantor.
Rubenstein said he spends a lot of time with the new additions, of which there were 30, to discuss potential areas of growth.
"I've never been more excited to come to work," Rubenstein said. "There is so much we can do. When we look at how they've been servicing clients, and because we have scale in technology, we can do this 50 times better."
ETFs are a natural stepping stone into bond trading, as the latter represents a way to hedge risks one could face by trading the former. Implementing that strategy was expedited thanks to the progress made by electronic marketplaces for trading such MarketAxess and Tradeweb.
The bond market, which was valued at $9.2 trillion in the US in 2018, has long been a top-heavy market dominated by the largest banks and investors with a majority of trading done over the phone. Electronic marketplaces have slowly captured more market share, with roughly 26% of all trading taking place electronically.
High-frequency traders have taken notice, recognizing an opportunity to use their cutting edge technology in another asset class. In April, The Wall Street Journal reported Jane Street, one of the largest traders of ETFs, was making a push into trading corporate bonds.
Ryan Sheftel, global head of fixed income at GTS, told Business Insider the firm is currently an active participant in corporate bonds with the hopes of becoming a committed market-maker soon.
"You can see, the clients are voting with their feet on how they want to execute those securities," Sheftel said. "Taking our highly-adaptable liquidity, customizing technology, which was deployed for the fixed income ETFs, and now moving over to the underlying corporate bonds. That's very logical."
Sheftel said GTS is making a push into corporate bonds through both organic and inorganic growth. For the former, that includes bringing on those with expertise in pricing and hedging a large book of corporate bonds, Rubenstein said. As for the underlying tech, he said it's largely agnostic to what the firm is actually trading.
As for inorganic growth, Sheftel said GTS is looking at making more acquisitions to build out the team. Some firms have approached GTS, he added, but he declined to get into specifics on how serious talks were.
Sheftel said it's a natural progression of the financial markets where offering trading in a single asset class is no longer appealing to customers.
"If you are going to be big in trading, you need to be big across a variety of products," Sheftel said. "People who maybe have a high-quality niche expertise, niche went from being a major positive factor to now more of a limiting factor."
Kevin McPartland, the head of market structure and technology research at consultancy Greenwich Associates, told Business Insider the push from trading firms to diversify their offerings comes at a time when profit margins have slimmed in their traditional businesses.
Equities, foreign exchange and, to some extent, treasuries have become crowded asset classes for market-makers, he said.
"They are out looking for new opportunities, new places where they can deploy their technology and their expertise to bring liquidity to the market and, of course, find a profitable asset classes," McPartland said.
That being said, high-frequency traders' success in the corporate bond market isn't a sure thing. The lack of available data in bond trading makes continuously pricing the assets a complex and difficult task that can't be overlooked, McPartland added.
Relationships also need to be considered, as HFTs will need to work to get investors comfortable trading with counterparties they aren't used to working with. While that transition has been occurring for years, there is still some work to be done, he added.
"We're a long way away from where we were 10-15 years ago, but I still think there is some continuous effort to be made there to get clients understanding the value that they bring," McPartland said. "Why in some cases they are very competitive with banks and in other cases they are complimentary."