Pressure is mounting on MTS, the dominant eurozone government trading platform, to admit hedge funds as members.
Six hedge funds and non-bank institutions have now joined a cluster lobbying for membership of MTS, triggering deep unease among some investment banks, which currently have exclusive access to the platform, and consequently dominate trading in the €4,000bn ($5,250bn) eurozone government bond market.
The news came as senior officials admitted MTS could face censure from competition authorities if it blocked the funds.
“If we say no to these [funds], we have to say why – otherwise we could attract the attention of antitrust [authorities],” Gianluca Garbi, head of the Italian-based MTS, told the Financial Times.
That is because some of the hedge funds have promised to abide by all the current “market making” rules – which effectively would put them on a similar footing to banks in this market for the first time.
Some banks argued that hedge funds could trigger the “unravelling” of the bond-trading system, which is shaped by a complex set of so-called “market maker” rules that require MTS members to supply continuous price quotes, even at a loss.
MTS is in consultation about the request to admit the funds, but is not due to decide definitively until next month.
The hedge funds and trading groups pressing to join MTS include Citadel, Getco and DRW, three Chicago-based firms that have recently risen to prominence in the US Treasuries market, as well as Man Group, Vega and a large Indian hedge fund.
The move has sparked a heated debate in the eurozone region about the most effective way for governments to raise finance in the bond markets, and encourage secondary trading in these government bonds.
In the US there are no such restrictions on trading of Treasuries, and most trading in liquid US government bonds between big operators takes place on two competing electronic platforms known as eSpeed and BrokerTec, a unit of Icap.
Activity on these platforms used to be dominated by investment banks. However, in recent years, other big traders, including hedge funds, gained direct access to these systems, sparking a dramatic rise in trading volumes. Indeed, the biggest groups, such as Citadel, are now estimated to account for more than
10 per cent of trading flows.
Additional reporting by Richard Beales in New York
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