Citigroup's trading on European government bond platform MTS on August 2 has provoked a lot of hyperbole. Citigroup sold e11 billion of European government bonds on MTS and bought e4 billion back a few minutes later at a lower price, making a profit and causing losses at other primary dealers. According to one financial newspaper, Citigroup has ?systematically targeted other market makers' mandatory price quotes?, which has ?shocked rivals?. Consequently, the eurozone government bond market has been ?thrown into turmoil? and apparently national debt agencies have been forced into a period of ?intense soul searching?.
This is nonsense. Out loud primary dealers might well take the opportunity to knock Citigroup or express moral outrage. Off the record, they say Citi has done nothing illegal and no investors have been hurt. Some even admire Citigroup for finding a way to make money from a system that has become increasingly unprofitable. The fact that on MTS, unlike other systems, dealers have to list two-way prices for over five hours a day means that they make prices as neutral as possible. Bid-offer spreads are so tight ? sometimes one or two cents ? that to make a decent turn you'd have to do something on a grand scale, as Citi did.
After all, traders are paid to trade and the point of trading desks is to make money. Other primary dealers say they lost money but accept that it's an obvious consequence of being in a risk business. It's not uncommon for counterparties to get bids from five or six dealers over the phone and act on them all at once, but since nothing like this had been tried on MTS before, Citi took a risk. Arguably it didn't make an awful lot for it. After some initial protests from rivals, everyone's gone back to business.
The UK's Financial Services Authority, puffed up with its own self-importance, is investigating Citigroup on the basis that large players should think of the likely consequences of their trading strategies on liquidity, spreads and market stability.
But dealers say that Citi's tactics on August 2 have had a negligible impact on the market. They lost money when they all ran to hedge their exposure to Citi's sell orders in the futures market at the same time. Yet large dealers have many different ways to hedge risk away from the cash bond markets, and intra-day trading volatility in euro government bonds on August 2 was no different than usual.
The argument that Citi's actions have thrown the eurozone government market into turmoil and restricted liquidity are also pretty thin. MTS might have temporarily restricted the trade volume that can be transacted in a short time on the system in response to Citi's actions but turnover had been falling on the MTS system for a long time, as in other European bond markets.
Market players say there's enough liquidity on MTS for it to work perfectly well even if mandatory quotations were removed and dealers could trade according to their capitalization and appetite. As long as issuers continue to look at secondary market turnover and prices when awarding mandates ? and they do ? primary dealers will keep supplying liquidity to MTS.
Nor are issuers doing much soul-searching. They would be upset if liquidity fell directly as a result of Citi's actions because that could affect borrowing costs, particularly for the smaller issuers. But this hasn't happened. The issuers Euromoney has spoken to say it won't affect their relationship with Citi, a big liquidity provider.
All that other primary dealers have to bleat about is that, although they want a transparent interdealer market, they want to provide liquidity for their clients, not competitors. Supposedly, Citi has broken a gentlemen's agreement in the market.
Perhaps the next time one of these banks does a big equity block trade or a large currency swap, it should tell other banks in advance. We didn't know the capital markets worked in this way and neither does one of Citigroup's competitors. ?A gentlemen's agreement in the capital markets, eh?? says one banker, laughing. ?Who knew one of those existed??