One of the world's largest high-speed traders has 'opened up the kimono,' and it shows how Wall Street is changing

One of the top high-speed trading firms in the world is joining forces with the biggest investment bank in the world.

Virtu announced Wednesday it has entered in a strategic partnership with JPMorgan in the US Treasurys market, in what could be a prelude to more collaboration.

The partnership has broad significance for high-speed trading firms, for the investment banking world, and for the US treasury market, considered the most important market in the world.

Douglas Cifu, chief executive at Virtu, said in a statement on Wednesday:

I am very pleased to announce that we have partnered with JP Morgan on an initiative to marry our proprietary systems and order routing with JP Morgan trading experience through a technology and trading partnership in the dealer to dealer US Treasurys market.

The two firms have a long relationship. The bank has been a “key business partner” for Virtu since its founding, according to Cifu, and is the designated market maker (DMM) for JPMorgan’s stock on the floor of the New York Stock Exchange.

That appointment as DMM triggered the partnership, according to Cifu. The two firms started talking about market structure, and about Virtu’s technology, and that led to a proof of concept experiment to see whether Virtu could route JPMorgan’s Treasury market orders.

“It’s not like we’re flying into this blind,” Cifu said in an earnings call Wednesday. “It has been a long detailed review of our technology and how it would work with their trading DNA. We’re marrying their years and years of trading DNA with our very efficient, scaled market access and technology. Hopefully it is a 1+1=3, win-win type of scenario.”

The partnership marks a milestone for both high-speed trading firms and Wall Street banks. High-speed firms are in many cases now looking to rent out their technology, becoming vendors to former rivals. Wall Street banks meanwhile are increasingly realising they don’t have to do everything, and that sometimes partnering with others makes commercial sense.

“We’re putting some of our best folks on it, they have got some quality, very talented folks that they have had over here at Virtu, and we’ve really opened up the kimono to show them how we operate,” said Cifu. “We’ve very optimistic that this is going to be an important long-term relationship.”

There’s a theory that the rise of technology in finance will play out in three stages: revolution, evolution, resolution.

It looks a little like this:

  • Revolution: new technology-savvy entrants gatecrash the party, taking market share in no time. They have better technology than the legacy players, and basically eat their lunch. The establishment freaks out.
  • Evolution: Establishment players realise they’re getting usurped, and invest in their own technology and talent to catch up. There is a thinning of the herd among the new entrants, as consolidation takes place, new models are tested and found wanting in different market environments, and establishment players catch up to those that have easily replicable technology. Establishment players combine forces with newer entrants, either through acquisitions or partnerships.
  • Resolution: A new order is established. New entrants with a genuine edge survive and flourish, as do the establishment players that have invested in technology.

This partnership falls into the evolution camp.

Daniel Pinto, CEO of JPMorgan’s corporate and investment bank, has spoken at length in the past about JPMorgan’s efforts to prepare itself for changes to how the market operates. Trading is increasingly conducted over electronic platforms, and the fixed-income marketplace in particular is changing at a pace.

The partnership between Virtu and the giant bank could be just the beginning, according to Cifu.

“We view this, and I think JPMorgan hopefully views this, as the first step of a longer term relationship. They have talked about how they want to get more nimble and leaner in terms of how they access the markets, and hopefully we can’t be their partner in a number of asset classes where it works.”

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