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For generations, becoming a US primary dealer was the bond market equivalent of getting the Master Mason rank in the Freemasons — a sign that you’ve arrived at the apex of fixed income.
But Citadel Securities has after years of flirting with the opportunity decided to say “um, nah, no thanks”. From Bloomberg overnight:
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.
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.”
Primary dealers are the engine of the world’s biggest and most important market, committing to pro-rata buying of US Treasuries at auction and lubricating their trading afterwards. For decades, many big investors would only deal with a primary dealer. It was therefore both prestigious and practically important.
However, it does come with strings, and several primary dealers have griped to us that the economics don’t really make sense any more. The numbers dwindled from a peak of over 40 to about 20-25 or so. Not being a PD is unthinkable if you’re JPMorgan or Citi but, as the Treasury market swelled, there was a growing desire to broaden the ecosystem.
So the New York Federal Reserve in 2016 cut the minimum regulatory capital needed to qualify for a prime dealership in an effort to attract new members. Since then a few new smaller companies have been added to the list of primary dealers, like Amherst Pierpont Securities and (more weirdly) repo specialist ASL.
But the one that everyone has been expecting for years and years was Citadel Securities, which has become a major player in US government debt.
Back in 2016, CitSec told the FT that “this opportunity is clearly something we have to seriously consider”, given the “significant credibility” it entailed. As recently as 2022 Matt Culek, the trading firm’s chief operating officer, told Risk that “we do at this point expect this to be something we will do”. Just yesterday it became a member of the equivalent club in Germany.
So why has it changed its mind on becoming a US primary dealer? Well, the statement provided to Bloomberg is a little oblique, but it’s basically just more hassle than its worth.
Even without being a PD, CitSec has already become a huge force in Treasury trading. Well over half of the roughly $1tn or so of Treasuries that trade daily do so entirely electronically these days, and that’s Citadel’s forte. People just don’t care quite as much about the PD designation as they used to.
Moreover, It can still bid directly for Treasuries at auction, which has become far more common in recent years. Before the financial crisis, primary dealers used to absorb well over half of all Treasury auctions and then distribute the bonds on to clients, but as Stanford’s Darell Duffie told Bloomberg, that’s fallen to 10-20 per cent nowadays.
At the same time, being a primary dealer comes with additional regulatory scrutiny, which is something we assume Citadel isn’t crazy about. If the Treasury market keeps evolving into a centrally-cleared, electronic, all-to-all, diverse ecosystem, why bother?
However, it’s a worrying indictment of the primary dealership system, as it currently functions, that one of the biggest traders of US Treasury markets isn’t keen on joining the club.
If the six-decade old PD system does eventually wither and Ken Garbade writes a third book on the Treasury market’s history then Citadel Securities’ decision will probably feature prominently in the telling.