Altogether, the three market-making firms collected almost $30 billion of trading revenue in the first six months, helped by volatility in the wake of President Donald Trump’s tariff wars. It’s not quite the $48 billion delivered by the top three Wall Street trading desks — JPMorgan, Goldman Sachs Group Inc. and Morgan Stanley — but it’s getting ever closer.
Non-bank liquidity providers have rapidly expanded as they poured investment into technology and talent to win business from banks constrained from riskier bets in the aftermath of the 2008 financial crisis. As privately held firms, Jane Street, Citadel Securities and Hudson River Trading operate under less regulatory scrutiny than their banking rivals and are able to use their own capital to take bigger swings.“The global financial crisis created a changing of the guard, and the new players are those with technical and mathematical data prowess that the large investment banks can no longer compete with,” said Paul Rowady of Alphacution, which publishes research on proprietary trading firms. “This is a long arc and we are starting to see the fruit of that arc.”
Representatives for the market-making firms declined to comment on their results.
Electronic market-makers such as Citadel Securities deploy cutting-edge technology to quote prices for large amounts of bonds and execute trades at ultra-fast speeds and razor-thin spreads. While that drives down the profitability of every transaction, greater volumes make up for it.
Most got their start in US equities but have expanded to other asset classes and geographies over time. Jane Street, for example, began by trading American depositary receipts, and then expanded to exchange-traded funds on the floor of the American Stock Exchange, an asset class the firm now dominates.Both Citadel Securities and Jane Street have been pushing deeper than ever into fixed income, as the electronification of that market opened up opportunities to trade rates and corporate bonds. Known for its dominance in the US equity market, Citadel Securities added corporate bond trading to its fixed-income offering in recent years, as well as US, UK and European government debt.
“There’s not that many folks making that much money in capital markets,” said Larry Tabb, head of market structure research at Bloomberg Intelligence. “When banks can no longer become competitive in trading, then the customers will eventually shift to the folks that can provide them with the best price, directly.”
The pandemic also heaped attention — and controversy — on some market-making firms by fueling a rush of activity by retail traders stuck at home. The trading giants have played a growing role in equities markets, filling retail trading orders when volumes hit record highs.
Banks have retreated after post-crisis regulation made it more costly to use their own balance sheets for proprietary trading. Earlier this year, Morgan Stanley shuttered a unit focused on electronic market-making for US equity options, and Citadel Securities swept in to buy it. The on-exchange options business gave Citadel Securities a large portfolio of equity options positions and specialist posts on exchange venues including Cboe, Nasdaq and NYSE.
The expansion has had its drawbacks in some cases. Jane Street was thrust into the spotlight in July, when regulators cracked down on its trading business in the Indian options market. A 105-page order from the Securities and Exchange Board of India gave market participants a unique peek into the firm’s trades, in what was once referred to as Jane Street’s most profitable strategy.
Still, banks have an edge with their vast balance sheets, according to Tabb.
“If you really need a lot of capital,” he said, “you’re not always going to get it from Jane Street or Citadel or Hudson River.”
