New Player Vies for Bonds -- WSJ
April 06 2019 - 3:02AM
Dow Jones News
High-tech trading firm Jane Street Capital is challenging
traditional go-betweens
By Matt Wirz
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 6, 2019).
A high-tech trading firm known for its dominance of the
exchange-traded fund market is pushing into territory long
controlled by Wall Street banks: corporate bonds.
Investment banks and brokerages are the main go-betweens for
money managers looking to buy and sell corporate bonds, about $25
billion of which trade daily in the U.S. Now, Jane Street Capital
LLC, has begun offering the same service to investment firms on
electronic trading platform MarketAxess and has recruited about 60
clients, people familiar with the matter said.
The move puts Jane Street in direct competition with traditional
dealers like Goldman Sachs Group Inc. and JPMorgan Chase & Co.
It also shows how bond markets are being transformed by electronic
and algorithmic trading, innovations that swept stock and currency
markets more than a decade ago.
Jane Street's headquarters are a five-minute walk from Wall
Street, but in some ways the firm is more akin to a Silicon Valley
startup than an investment bank. "They have a different approach --
there's not a lot of sales and a lot of technology," says Mike
Nappi, a bond trader for mutual-fund manager Eaton Vance Corp. who
has bought and sold bonds through Jane Street. "That's different
from a traditional bank where they have a lot of sales and the
technology is more like Microsoft Excel."
To be sure, bulge-bracket banks are also using technology to
trade more bonds at a lower cost. JPMorgan, Goldman and others have
adopted algorithms and automation to increase the number of smaller
bond trades they do while freeing up human traders to focus on
larger and more profitable transactions, people at the banks
said.
Founded in 2000, Jane Street is a proprietary trading firm -- it
doesn't manage money for outside investors -- that specializes in
ETFs. The firm uses computer algorithms and human traders to buy
and sell the funds and their component securities to take advantage
of price differences. The company expanded into other areas as ETFs
spread from stocks to different asset classes; it now makes markets
in stocks, derivatives, currencies, commodities and bonds.
Jane Street has traded anonymously on MarketAxess for two years
but in recent months it also became a so-called disclosed dealer on
the platform, the first such transition by a MarketAxess client,
according to people familiar with the matter. The new status allows
bond investors to include Jane Street on trading requests they make
to the dozens of dealers already active on the electronic
venue.
By joining those ranks, Jane Street aims to get recognition from
asset managers for the balance sheet it uses to buy and sell with
them, ultimately boosting the amount they trade with the firm, said
Matt Berger, the firm's head of fixed income and commodities
trading. Jane Street trades about $550 million worth of corporate
bonds in the U.S. every day, he said. This amounts to about 2% of
the overall market, five times more than the firm traded two years
ago.
That expansion would have been impossible without the recent
spread of electronic bond trading.
Technology-driven trading firms like Jane Street and Virtu
Financial LLC emerged after stock exchanges electronified in the
1990s, connecting buyers and sellers through computers and reducing
trading times to fractions of a second. The firms' computer
scientists built programs to cull market data and identify
profitable trades that humans missed. Now, quantitative trading
firms dominate the stock market.
Electronic trading has been slower to catch on in debt markets
because bonds typically trade over-the-counter rather than on
centralized exchanges. That has begun to change over the past five
years as banks and money managers turn to electronic trading and
data analysis to trim costs and to connect to more trading
partners. Electronic trading platforms like MarketAxess have given
Jane Street and other quantitative investors venues to apply the
technology they used in other markets.
MarketAxess accounted for about 18% of all U.S. investment-grade
bond trading last year, up from 12% in 2014, according to data from
the company.
Jane Street, founded by four partners including Michael Jenkins
and Robert Granieri, now has about 50 bond salespeople and traders.
Recruiting materials tout chess facilities, office gyms, math
puzzle contests.
The firm trades less debt overall than most banks, which still
employ hundreds of human sales and trading staff. But when it comes
to its inventory of corporate bonds, "we are on par with the
banks," Mr. Berger said.
Jane Street hold bonds on its balance sheet for days or weeks to
facilitate so-called portfolio trades of bundles of bonds often
tied to ETFs. The portfolio deals normally range from $50 million
to $750 million but can go as high as $2 billion, a person familiar
with its trades said.
Traditional dealers like Goldman also provide portfolio trading.
But banks in general have scaled back their bond inventories
because regulations like the Dodd-Frank Act increased the capital
banks must set aside against such holdings. Primary dealers held
about $6 billion of investment-grade corporate bonds in March, down
from about $14 billion in 2013, according to data from the Federal
Reserve Bank of New York.
Jane Street held $2.2 billion of corporate bonds in December, up
from $319 million a year earlier, according to Securities and
Exchange Commission filings. The company also makes bets that other
ETF and bond prices will decline to hedge its corporate
bondholdings, the person familiar with its trades said.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
April 06, 2019 02:47 ET (06:47 GMT)
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