Citadel Securities, Jane Street battle fixed-income connectivity challenges with MultiLynq buy-in

The ongoing evolution and electronification of fixed-income markets is a double-edged sword: more asset classes become electronically tradeable, yielding efficiencies, while more venues emerge to trade them, resulting in greater competition and liquidity. Add to this the current market conditions and interest-rate volatility, which make fixed income a dynamic and attractive marketplace for market operators and market participants alike, and which will drive increased participation among electronic traders.

But the cost of establishing and maintaining connectivity to a growing number of marketplaces is becoming a financial burden to trading firms, while the time taken to connect to each new market makes it harder to take advantage of new opportunities and enter new markets as quickly as they would like.

Troy Kane, global head of derivatives and FICC (fixed income, currencies and commodities) development at Citadel Securities, is responsible for relationships with many of the venues that Citadel currently trades on or is looking to build relationships with.

“At Citadel Securities, we’ve grown our fixed income business significantly over the past five or six years, and are very excited about the continued growth opportunities for this asset class,” Kane tells WatersTechnology.

But being able to take advantage of opportunities in these new areas comes at a price. “Fixed income is still an emerging asset class for electronification, and the technology is not as uniform as it could be,” he adds. “So, when we have to develop to multiple venues—and more venues are emerging every year in the fixed-income space—it involves a lot of resources.”

This doesn’t just involve the cost of building one-off connections to markets, but also the cost of updating them to meet venues’ system changes, maintaining them over time, and integrating them with multiple in-house systems, such as risk, surveillance, and post-trade services. There’s also an “opportunity cost”—the time taken to establish connectivity to each marketplace, which is complicated by the fact that trading venues each have different systems and protocols.

Patrick Scheideler, CEO and co-founder of MultiLynq, which provides connectivity to these markets, says most firms report it taking between three and six months to connect to each new market.

“The theme of electronification of fixed-income markets continues, and that’s positive for the markets—it adds liquidity and price transparency, but also brings added complexity,” he says. “For example, you have a lot of destinations or trading venues, and they each have their own messaging protocols, configurations, and styles of interacting with their markets. There’s a lot of sophistication involved in connecting to all these venues and maintaining connectivity to them.”

Whereas, when connecting to equities markets, firms may be able to re-use a lot of elements from connecting to one exchange when connecting to others, fixed-income markets have not yet widely adopted harmonized standards for connectivity. This may simply be because of the time and effort involved in collaborating to form and implement standards, or because they don’t see it as offering competitive advantage—in fact, they may even view offering individual trading protocols as providing a competitive advantage, or at least, making their market more “sticky.”

“In fixed income, the amount of work that can be leveraged to connect to multiple venues is very limited,” Scheideler says. “For example, the session configuration—where you send quotes, orders, or RFQs, and whether you are initiating it—changes venue-to-venue.”

A better use of time

MultiLynq essentially abstracts the process of connectivity by providing a single API to connect to it, then it manages the connectivity to each marketplace, eliminating the need for firms to do that themselves. Thus, instead of managing multiple connections, each firm needs only to manage one connection to MultiLynq, should they choose to.

“So, firms can spend that three-to-six months connecting to us, but then adding market access takes no time at all because they’re using the same API,” Scheideler says. “It’s our view that fixed-income markets—especially credit and municipal bonds—will become more electronic, and services like ours will become more popular.”

A senior executive at one of the trading platforms to which MultiLynq provides access says there is definitely a need and an appetite for this kind of solution among market participants. Building connectivity to his venue typically takes firms around three months, he adds.

“The market is becoming fragmented. A lot of participants are launching new protocols and new platforms. For trading firms, using in-house resources is expensive, and IT budgets continue to be very constrained. So, if you don’t have a lot of capital that you can put to work, this is a way to connect to markets much faster,” the executive says.

The executive says his platform also offers a range of connectivity options, including FIX connectivity, and connections from all major ECNs and EMS/OMS providers, but warns that these aren’t cheap.

“We offer our own connectivity, which is really good, but firms need to decide whether they have the resources to do that themselves,” the executive says, adding that—while he can’t be seen to endorse a service that competes with his firm’s in-house connectivity option—MultiLynq can help accelerate getting more trading clients on board.

“We have a queue of people trying to connect to us. So, if MultiLynq can alleviate that pressure, we can get firms trading more quickly, because that’s our core revenue—if we don’t trade, we don’t generate revenue,” he says.

It’s that ability to accelerate connectivity that initially attracted Citadel to MultiLynq. The firm began its foray into fixed income by establishing and managing its own connectivity to the major marketplaces, such as Tradeweb and Bloomberg. But as more venues came to market, it realized that connecting to them all—and maintaining and updating those connections over time—would prove onerous, even for a firm with the size and resources of Citadel. So, to add access to other markets without adding complexity, the firm enlisted MultiLynq, becoming one of the vendor’s first clients.

Initially, Citadel used MultiLynq to add access to new venues that it wanted to trade on. “Where MultiLynq has proven most valuable is in connecting to smaller venues that require a lot of development time. The product fills an important gap in allowing us to accelerate our connection to those markets,” Kane says.

But the vendor will also enable Citadel to more easily connect to future marketplaces as more classes of fixed income become more widely electronically traded.

“As we continue to grow in fixed income, and as other markets continue to modernize and electronify—such as municipal bonds—by partnering with a company like MultiLynq, we can more quickly expand into new areas,” Kane says. “MultiLynq is essentially lowering the barriers to entry for a market in transition.”

A better use of money

As one of MultiLynq’s first clients, Citadel was able to help shape its offering. And now, to continue having input into its roadmap, the firm—along with Jane Street—has taken an undisclosed minority investment in the vendor.

Citadel doesn’t operate a “Ventures” arm like some firms, but still often invests in “disruptors” in the markets—mainly exchanges so far, such as the EDX crypto exchange along with Fidelity and Charles Schwab.

“Citadel Securities is always interested in exploring investments in disruptive technologies that bring efficiencies to the markets and reduce barriers to entry—and investing allows us to shape and influence the growth of these companies,” Kane says. “That’s really the strategic value of being an investor—and we can bring a lot of expertise from other markets that we trade in to help them shape products in the credit markets and beyond.”

Jane Street declines to comment, but the firm’s global head of fixed income Matt Berger says in a statement that it invested in MultiLynq after seeing firsthand how the vendor’s solutions can “greatly streamline electronic trading.”

Scheideler says MultiLynq wasn’t actively seeking investment, but always had the philosophy that it would accept funds if doing so would strengthen relationships and drive the future of the business. And while the infusion of cash—again, undisclosed—is welcome and will allow the vendor to hire more staff, scale up its sales and marketing efforts, and invest in the physical infrastructure required to support more clients on its hosted solution, that’s not the biggest benefit, as he sees it.

“We’ve flown under the radar for a while, but this strategic alliance with two industry leaders will help us in terms of our position in the industry and how we are viewed by others, given the quality of these firms,” he says.

However, Scheideler stresses that the company remains independent. “For us and our roadmap going forward, it’s a minority investment, and we still retain control. We see their input in terms of our future roadmap, products and services as very valuable … but the independent aspect of this company is very important to us, and we need to continue that. It’s central to our strategy and the long-term success of the company.”