(Bloomberg) — Citadel Securities has quietly shelved plans to join one of Wall Street’s most prominent clubs: The ranks of bond dealers that trade directly with the Federal Reserve.
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For nearly a decade, the firm’s executives had seen that move as a step toward its goal of becoming a dominant force in the trading of Treasuries.
But with Citadel Securities already cementing its status as a key market maker in US government bonds, the firm no longer sees a need to join the two dozen securities firms that are designated primary dealers with the Fed, according to people familiar with the matter.
“Citadel Securities is one of the largest liquidity providers to institutional investors in Treasury securities,” the firm said in an emailed statement. “As the market has continued to democratize and evolve, including the move towards central clearing, clients are less focused on the primary dealer designation when seeking access to the best liquidity.”
The decision is the latest example of how shifts ushered in by the rise of electronic trading have diminished the allure of becoming a primary dealer, a role that has historically been used to secure a place at the center of the world’s most important bond market.
Those firms trade directly with the New York Fed, engaging in the open-market operations that facilitate monetary policy. As part of that role, they are also required to bid at all US government debt auctions, which has traditionally made them a main conduit for investors looking to buy newly issued securities.
Under Chief Executive Officer Peng Zhao, Citadel Securities steadily expanded its secondary market operations to deal in all the Treasuries that primary dealers are required to trade. That extended its reach in Treasuries, where average daily volumes have roughly doubled over the past decade to more than $1 trillion, according to Coalition Greenwich.
“You can be successful as a liquidity provider and market maker in US Treasuries today without being a primary dealer,” said Kevin McPartland, head of market structure research at Coalition Greenwich.
The US decision contrasts with the firm’s moves in Germany, where the government’s finance agency — which runs its debt sales — said Wednesday that it added Citadel Securities to a select group authorized to take part in bund auctions.
Becoming a participant in Germany’s auction group will likely help its efforts to ramp up rates trading in the country, where the primary and secondary bond markets are more closely intertwined than in the US.
Founded by billionaire hedge-fund manager Ken Griffin, Citadel Securities leveraged its early edge with algorithms to become a major force as trading migrated to electronic platforms.
In the US, Citadel Securities now commands roughly 35% of listed retail stock trades and almost a quarter of all equity trades. It’s also ramping up involvement in fixed-income trading beyond interest-rate swaps and Treasuries to serve institutional investors betting on corporate debt.
As it expands into new asset classes and geographies, its earnings potential has also risen. Net-trading revenue surged 81% during the first half of 2024 to $4.9 billion, putting it on track to hit a record high this year.
While becoming a primary dealer opens up access to the Fed’s trading programs and ensures a pipeline of new bonds for customers, the advantages have have been diminished by shifts over the past few decades. Among them is the increasing use of direct bidding by money-management firms to buy bonds straight from the Treasury, reducing the need for go-betweens.
Arms of big banks like Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among the Fed’s dealers, but the ranks have thinned since the late 1980s. ASL Capital Markets was the most recent to join in 2022.
Citadel Securities could still revive its plans to become a primary dealer if market-structure changes warrant doing so, the people familiar with the matter said.
Darrell Duffie, a Stanford University finance professor and expert on debt-market structure, said the share of new Treasuries bought by primary dealers has dropped to around 10% to 20% from roughly half before the 2008 financial crisis.
“You do get the benefits of putting it on your masthead and access to certain Fed market operations, which can be useful,” Duffie said of primary-dealer status. “But there’s also some disadvantages such as reporting requirements and increased oversight by the central bank.”
(Updates with more detail on firm’s efforts in German bond market)
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