Market-makers take on the banks in PR battle over trading reforms

When an industry lobby group starts a public relations campaign, the cynical observer instinctively asks: Why? Why now? Do they have an image problem? What are they worried about? Do they want changes in regulation?

These are the questions prompted by the campaign “to promote better understanding of independent market‑makers” in Europe, launched on 27 September. Firms such as Citadel Securities and Virtu Financial that use their own capital to make markets in shares and bonds have become important elements of the capital markets ecosystem over the past 20 years. The increasing electronification of markets has enabled them to grab a large chunk of the action from the banks, whose appetite for market making has been greatly reduced by the changes to their capital rules following the financial crisis.

So why is the #WeAreMarketMakers campaign being launched now? Surely there is more to it than marking the 10th anniversary of their trade body, the FIA European Principal Traders Association.

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Certainly, if you look to the US, there are plenty of reasons why the industry might think it needs a bit of a PR push. Having spent years trying to fight the public suspicion of “high-frequency trading”, the industry is now under the regulatory spotlight, following its role in the Robinhood and GameStop meme stock saga.

Gary Gensler, chair of the US Securities and Exchange Commission, has raised the prospect of banning “payment for order flow”, the controversial practice that allows digital stockbrokers such as Robinhood to make money by selling trades to market‑makers.

He has also expressed concern about the dominance of two of the biggest market-makers, Citadel and Virtu, which between them handle more than 70% of total retail turnover in US listed stocks.

Separately, market-makers are lobbying furiously over possible reforms to the US Treasuries market. The market-makers strongly back some suggested changes, such as the introduction of central clearing of Treasury securities, but are opposed to other reforms that they see as special pleading by the banks.

If the independent market-makers’ lobbyists have their hands full in the US, the issues in Europe are rather different. Their European group, of which Citadel and Virtu are prominent members, argues that payment for order flow is illegal in the EU under MiFID II. But the market-makers are concerned that it is happening anyway in several member states, notably Germany. This creates “an unlevel playing field” and puts best execution at risk, according to Piebe Teeboom, the secretary general of FIA EPTA.

As in the US, there are also broader reviews of regulation under way, with the EU having another look at MiFID II and the UK conducting a wider examination of wholesale financial market rules.

The independent market-makers want their voice heard in these debates and the new PR campaign is clearly designed to highlight the important role they play in the capital markets these days.

A report commissioned by FIA EPTA shows that its members provided a key source of liquidity to asset managers when some of the banks pulled back during the trading crisis last March.

“Liquidity challenges in bond markets early in the pandemic created a vacuum, forcing the buyside to find new trading partners and access points to liquidity — and market-making firms stepped up to fill the void,” says the report’s author Rebecca Healey.

The independent market-makers proved particularly important for smaller asset managers, which did not have such strong relationships with the banks, the report found.

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The crisis showed the importance of having “a diverse set of liquidity providers available to you”, says Teeboom.

To bolster that diversity, the market-makers are keen to ensure that they are not disadvantaged in the current reviews of regulation. They are, for example, opposed to the UK Treasury’s idea of killing the EU’s “share trading obligation”, which was introduced to encourage trading on transparent markets. For the market-makers, the big prize would be more transparency around price reporting, particularly the introduction of a “consolidated tape” in both equities and bonds.

But the market-makers often find themselves opposed by the big investment banks, which want to defend their less transparent, relationship-based model. “We still see a bit of pushback from vested interests,” says Teeboom. “It is no use just changing the rules to facilitate methods of trading that are out of date. There is a role for relationship-based provision. But it is very clear from the feedback in our report that the buyside wants diversity at their fingertips.”

There is a good case for reinforcing that diversity but investment banks have formidable lobbying clout. However strong their argument, the market-makers will have their work cut out to win the PR battle.

To contact the author of this story with feedback or news, email David Wighton

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