Continuing the trend that began a few years ago, non-banks are expanding derivatives market making activities and are gaining traction, as lower operating costs allow them to be more competitive.
Hedge fund-broker behemoth Citadel could see its share in the swaps market-making business increase, as banks continue to withdraw in response to increasing costs. Citadel became the first buy-side shop to open a market-making business arm for swaps in 2014. Last year it then became the first buy-side member of LCH.Clearnet’s interest rate swaps clearing unit, SwapClear. It is also currently cited as the number one market maker by volumes in the dealer-to-client swaps market by Bloomberg, and is known for quoting exceptionally thin spreads and handling very large order sizes. To some extent, Citadel has taken up the slack from some of the banks which have lost their appetite to provide liquidity in the derivatives market. Hamill believes that dealers cannot operate at the same cost levels as a Citadel, which is perhaps the more important factor these days.