(Adds quotes and detail on market share)
By Helen Bartholomew
LONDON, Nov 15 (IFR) - BNP Paribas has partnered with electronic market-making firm GTS for US Treasury trading, cementing a new era of collaboration between banks and high-frequency trading firms in an increasingly electronic market where technology is providing the competitive edge.
The tie-up, which represents an ambitious expansion of BNPP’s US rates trading operations, will see the bank’s clients access the US$14trn Treasury market using GTS technology with the promise of improved pricing, tighter spreads and deeper liquidity.
“The US is an important market for BNP Paribas, and we are fully committed to expanding our capital markets franchise by focusing on our clients and their demand for improved liquidity and better transparency,” said Olivier Osty, executive head of global markets at BNP Paribas.
“This innovative collaboration with GTS illustrates how we work with firms that are experts in financial technology to enhance our client offering across the bank’s value chain. It is an important step in our ambition to become a leading digital capital markets house in the financial services industry.”
Using proprietary algorithms to trade on razor-thin margins and at lightning speed, automated trading firms have muscled in on the Treasury market and now account for around half all dealer-to-dealer activity, according to industry estimates.
That trend has spread to interest rate derivatives, where a regulatory-driven shift towards central clearing opened the door for Citadel Securities to take a top three position in benchmark US dollar swaps within a year of its 2014 launch. The Chicago-based market-maker’s swaps success has triggered a shift in bank’s flow rates operations, with incumbents adding algo to their pricing and hedging activities or partnering with technology specialists.
Last year, JP Morgan struck a deal with Virtu that sees the HFT firm provide technology to the US dealer for electronic Treasury trading. Credit Suisse partnered with hedge fund Tower Research Capital in 2014 as part of a plan to expand its share of fixed income trading.
BNPP and GTS believe their tie-up goes a step further than efforts that largely externalise technology as the platform has been mutually developed by dedicated teams from both firms.
“This collaboration is a transformative moment for capital markets and reflects the next phase in the evolution of relationships between banks and electronic market makers, which provide investors with a low cost and more efficient trading experience,” said Ari Rubenstein, CEO of GTS
“GTS continues to focus on innovative methods of providing more liquidity in more places by broadening access to our trading technology and building platforms for the future.”
BNPP’s Osty said the collaboration should push the bank’s share of Treasuries trading to 5%, up from 1.5% currently, propelling the firm into a top 10 position.
“Treasuries are a very commoditised business. It’s not something where people are making a huge amount of money but everyone is looking at your market share to see if you’re credible in the US space,” Osty told IFR. “This makes us much more credible and visible for our clients on the rates side.”
Improved Treasuries pricing is also expected to translate into a larger pool of derivatives activity, including swaps and options.
“As you price swaps based on your hedges and you hedge swaps using Treasuries, de facto there’s going to be an improvement on your swaps prices,” said Osty. “It’s a consequence of our best pricing in Treasuries that would allow us to be much more relevant on the swaps business.”
The two firms plan to expand the focus of the agreement across asset classes. Equities are expected to be added to the platform next year, leveraging GTS’s leading market-maker position on the NYSE. (Reporting by Helen Bartholomew)