Citadel Securities calls on US regulators to enhance credit market competition
Citadel Securities has urged US regulators to take greater action to prevent banks from using the heft of their debt underwriting arms to win other business from institutional investors in the US$11trn US corporate bond market at a time when the fast-growing market-making firm is making a concerted push in credit trading.
Citadel Securities called on the Securities and Exchange Commission and the Financial Industry Regulatory Authority to "remove conflicts of interest" in US corporate bond offerings – a market it says "dwarfs" most asset classes with US$2trn of new issuance last year. Specifically, in a white paper it urged regulators to ensure that bond underwriters “cannot condition new issuance allocations on where investors send their secondary market flow”.
FINRA rules already aim to mitigate conflicts of interest in the allocation process by prohibiting underwriters from tying or bundling other services – like secondary market trading – to investor allocations.
However, Citadel Securities said such measures don’t go far enough, resulting in trading activity becoming “artificially concentrated among a small group of underwriters, thus decreasing market competition and liquidity, and increasing transaction costs for all investors”.
"Academic research suggests that the amount of secondary market trading activity directed by an investor to a specific underwriter is an important factor in new issuance allocation decisions," the paper said.
"Tying or bundling secondary market trading activity to new issuance allocations negatively impacts the US corporate bond market."
The proposals are part of a broader set of recommendations from Citadel Securities aimed at enhancing efficiency, resiliency, competition and transparency across financial markets. It comes as the market-making firm, which is majority owned by hedge fund billionaire Ken Griffin, continues to make inroads in products typically dominated by traditional investment banks. Citadel Securities grew rapidly in 2024 to report a record haul of nearly US$10bn in trading revenues.
While corporate debt trading has long been dominated by the likes of JP Morgan and Goldman Sachs, non-bank trading firms have made significant gains in recent years amid a rapid electronification of markets.
Citadel Securities targeted senior bank traders in a recent hiring spree as it looks to expand in corporate credit, having already established itself as a competitive alternative to investment banks due to its prowess in other markets, such as equities.
Treasuries
Elsewhere, the non-bank trading firm has recommended that the SEC do more to support indirect clearing models as the US$28trn Treasury market moves to mandatory central clearing by the end of next year.
“Sponsored service” models – an indirect form of clearing – are the most widely used method among Treasury market participants but around 95% of market participants say indirect "done-away" clearing is “critically important” to support mandatory clearing, according to a survey by Coalition Greenwich.
Done-away clearing involves banks clearing Treasuries for their clients within their prime brokerage, agency clearing or futures commission merchant business units.
“Since becoming a direct member of a clearing agency is not a viable pathway for many market participants due to the associated eligibility requirements and default management responsibilities, the vast majority of market participants should be expected to access central clearing through an indirect clearing model,” the Citadel Securities white paper states.
CME Group and ICE have already said they intend to provide done-away clearing services but have yet to obtain rulebook approval from the SEC.
“Ensuring that ‘done-way’ clearing is made available well in advance of the implementation date sets the foundation for successfully implementing broader central clearing in this critically important market,” Citadel Securities said.