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2015 Roundtable on Treasury Markets and Debt Management

Remarks by Ken Griffin

Founder and CEO, Citadel LLC

November 20, 2015

As Prepared for Delivery

Introduction

Thank you so much for the kind introduction. 

This is an incredibly important moment for the Treasury markets. The conversation that has 

been taking place here today is timely, relevant and important to investors and to our country. 

Our Treasury market is how we fund our deficit. It is one of the most important markets in the 

world, a place to go to put cash or make investments to meet long-term liabilities. The

functioning of this market is critical to the well-being of our nation. 

Let me begin with a brief background on Citadel. Citadel is one of the world's largest hedge 

funds – this is well known. We manage about $25 billion, principally on behalf of sovereign 

wealth funds and large institutions. 

What is not as well known is that we are one of the world's largest securities dealers in a 

separate business known as Citadel Securities. We are perhaps the single largest trader of 

equities in the world, a business that we started about 15 years ago. We routinely account for 

roughly 15 percent of the turnover here in the United States and in the major European 

markets. 

The business that we built, based upon predictive analytics, technology, and risk management, 

we have now applied beyond equities to the fixed income and commodities markets. 

In U.S. Treasuries, we are one of the three largest traders in the interdealer cash market. In the 

interest rates space, we are in the top 10 across the futures complex at CME. In addition, in the 

last 12 months, we have entered the U.S. interest rate swaps market. On Bloomberg’s swap 

execution facility, which is the single largest trading destination for institutional clients to trade 

interest rate swaps in the United States, we enjoy the coveted position of being the number 

one liquidity provider by volume, only 12 months after entry. 
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Overview of the U.S. Treasury Market

The Treasury market really is two separate and distinct markets: the dealer world and the 

customer world. 

In the customer world, the vast majority of trading is between end users, such as mutual funds

and asset managers, and large banks. It is a business built on an internalization model. Many of 

the largest banks have made significant investments over the last decade around thoughtfully 

internalizing the flow of their customer franchise. That is, in some sense, the essence of what 

their business has become. They are extremely good at taking risk in, offsetting risks across 

their portfolio, and then liquidating the risk they do not wish to carry into the interdealer 

market. 

The interdealer market is a radically different market. In on-the-run Treasuries, it is almost

completely electronic, with roughly 97 percent traded on eSpeed and BrokerTec. The 

interdealer market is, interestingly enough, not dominated by the banks. It is dominated by 

what are referred to as principal trading firms (PTFs), firms such as Citadel that are 

extraordinarily good at making continuous two-way markets in securities across various market 

conditions. 

So, to take a step back, customers interface with the banks, the banks internalize the orders to 

the best of their ability, and then take the orders that they do not wish to fill to the interdealer 

market, along with their necessary portfolio adjustments. 

As a result, when you look at interdealer market activity, you are really looking at the most 

difficult-to-trade transactions in the marketplace. You are not looking at the same vanilla trades 

that define most of the activity by end customers. 

It is therefore important to think very carefully about what the information that you observe in 

the interdealer market actually tells you. One thing that information tells you is that the 

interdealer market over the last several years has continued to be very robust at providing 

liquidity across market conditions. We have seen no material deterioration in bid/ask spreads 

or in market depth or in other measures of liquidity such as price impact, even though a greater 

and greater proportion of the trading in the interdealer market reflects trading against 

increasingly toxic flow. 

Evolution of the U.S. Treasury Market

Now, focusing on the evolution of markets that we think will take place over the years to come,

we believe end customers are increasingly going to look for additional sources of liquidity 

around the world. Customers have become increasingly thoughtful about managing transaction 

costs within their portfolios. They have placed the dealer community under great pressure to 

perform. They will look to the PTFs in the long run because the same firms that can trade the 
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toxic flow from the dealer community are well equipped to trade the less toxic flow from the 

end user community. 

We therefore believe that, in the years to come, these two segmented markets will increasingly 

become one market, where end customers will interact more and more with today's wholesale 

liquidity providers. And we believe this will happen as a result of pure economic forces. As end 

users look to bring down their costs of doing business, they will migrate towards electronic 

trading and access to additional sources of liquidity. In addition, as we see a generational shift 

take place on trading desks across the world, we see a younger generation more comfortable 

using screens as the primary way to conduct business. 

Liquidity Risk

One of the questions that has been posed is around liquidity risk in the Treasury markets. New 

York Fed economists Tobias Adrian, Michael Fleming, Daniel Stackman and Eric Vogt examined 

the question of whether liquidity risk has moved higher over the past two years in a piece 

published earlier this year entitled “Has Liquidity Risk in the Treasury and Equity Markets 

Increased?” Meanwhile, CFTC Chairman Massad, in a speech in October, highlighted that 

sudden spikes in illiquidity also occur in the futures market. 

First, in the supposed “good old days” – and I started trading about 28 years ago – information 

took far longer to move across the market. It is hard to imagine that we used to live in a time

when the daily paper was actually a really important source of timely information. Market 

participants today react to news, whether it's important economic releases or important 

speeches by policy leaders, with incredible speed. 

A simple story highlights this. Back in 2013, on Bloomberg, there was a story about a fire on a 

plane at Heathrow, and we were suddenly losing significant sums of money as a market maker 

in Boeing stock, because someone else connected the dots. That plane on fire at Heathrow had

a battery problem. It was a new Dreamliner. And people were selling Boeing stock. As a market 

maker, that was not a particularly good day for us. 

The breathtaking speed at which news is assimilated into market prices is indicative of a wellfunctioning market. Our markets should incorporate all information as rapidly and as efficiently 

as possible. 

Second, the discussion of liquidity risk also involves the topic of intraday price moves. Often 

when a major piece of economic news is released, such as nonfarm payroll, and there is a 

surprise to the upside, meaning we have more jobs in America, the bond market immediately 

sells off in response. Yet, by the end of the day, the bond market closes unchanged or perhaps 

even lower in yield. Why is this? How is it that these intraday moves can happen – and what

does that tell us about the functioning of our markets? 
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I think it is very important to understand that large portfolio managers use days with news to 

reposition their portfolios. If a portfolio manager is trying to reshape a portfolio in amounts

that can measure tens of billions or more, it needs a moment in the marketplace when there is 

significant news so that it can effect that portfolio transformation with the minimal amount of 

market impact. 

And so you will see large portfolio managers consciously wait for news releases to begin 

portfolio transitions. We see this in the equity markets consistently, with earnings 

announcements for example, when stories question why the stock finished up if earnings were 

poor. The answer is that for a large mutual fund looking to acquire a position, that is their 

moment of entry. And so it is very important to take a step back and understand that markets 

reflect not just news, but also flows. 

Role of PTFs

I would now like to turn briefly to the role of PTFs in the Treasury market. It is clear that

nonbank liquidity providers have become more important in the interdealer market than ever 

before. In fact, there was a recent story that roughly 8 of the 10 largest players in the 

interdealer market are PTFs. Why are these firms so successful in the market? I believe it is 

because they have the culture, the ethos, and the vision to appreciate the importance that 

large data and predictive analytics play in our financial markets. 

I learned computer programming when I was in high school. I employ a team of physicists, 

engineers, and individuals with backgrounds as diverse as meteorology and astrophysics. They

are comfortable with large datasets and predictive analytics. It is know-how more akin to Silicon 

Valley than to Wall Street, but in this age of big data, it is the skill set that matters. We have the 

ability to assimilate vast amounts of information across different markets – foreign exchange,

commodities, Treasuries – to help hone predictive analytics that assist us in traversing everincreasingly competitive marketplaces. 

I believe these skill sets will be found more and more in firms such as Citadel, firms that are 

actually well capitalized compared to what most people assume. We have roughly 40 percent of 

the capital base that Goldman Sachs had back in the early 1990s committed to our market 

making activities, and only to our market making activities.

Recommendations for the U.S. Treasury Market

Let me offer a couple of potential recommendations for the Treasury market. 

First, and I cannot emphasize this enough, we must relentlessly drive to achieve 

nondiscriminatory access from a regulatory perspective. Do not underestimate the motivations 

of the current incumbent players to maintain a closed system; a system where firms that are 

new entrants cannot compete for customer business. 
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In the U.S. interest rate swap market, on the back of the Dodd Frank Act, we now have clearing 

for interest rate swaps. This permits firms such as Citadel to compete for end customers’

business. Let us look briefly at what that new entry has looked like for the market, for market 

participants, and for end investors. 

In late 2014, we transacted our first swap with an end customer and our market share was 

zero. Since the beginning of 2015, our innovative model has resulted in our market share 

growing dramatically. Today, on Bloomberg’s swap execution facility, which is the largest 

institutional client trading venue for interest rate swaps in the United States, we enjoy the 

coveted position of being the number one liquidity provider by volume. 

Over that period of time, we have seen bid/ask spreads compress by 50 percent in one of the 

single largest interest rate markets in the world. And I think it is 100 percent attributable to the 

regulatory success of mandated clearing and mandated open access and nondiscriminatory 

behavior. 

And, just for context, where is the bid/ask spread for a 10 year interest rate swap today? Today 

it is between one tenth of a basis point and one quarter of a basis point. To put that in 

perspective, in the “good old days” in 1992, the average bid/ask spread for a 10 year interest 

rate swap was 3 basis points. Since then, the cost of trading has come down in interest rate 

swaps somewhere between a factor of 10 and a factor of 30. 

Similarly, in equities, in the “good old days” when I used to trade from a phone in my college 

dorm room – we all remember how stocks were priced. A blue chip stock might have been 

quoted 60 to 60 1⁄4. Today, that quarter of a point spread is replaced by a penny on a stock that 

trades at multiples times the price. Electronic trading has revolutionized the end investor's 

ability to transact at far lower prices. This, of course, drives down the cost of capital and, in the 

case of the Treasury market, drives down the cost of issuance. 

How important is nondiscriminatory access? Look at the credit default swap market and the 

banks' recent nearly $2 billion settlement for allegations of anticompetitive behavior suggesting 

they went to great lengths to prevent entry by PTFs and others. Nondiscriminatory access is 

incredibly important to the functioning of our marketplace.

Second, another key topic is the regulation of Treasury trading venues. It is essential for our 

trading venues to have appropriate regulatory oversight. I believe there are a couple of 

elements that are important for the confidence of the market. The first is that the rules of the 

marketplace must be crystal clear and crystal clear to all. All access arrangements should be 

public, all fee arrangements should be public, and there should be a level and open playing field 

for all. 

Kill switches at trading venues are of critical importance. There is no doubt operational risk 

exists in a world of electronic trading. I would love to tell you that we will live in an age where 
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there will never be a bug in a piece of software. It will not happen in my lifetime. Software is a 

bit different than buildings. This building has all kinds of inconsequential construction flaws, but 

it still stands. 

In software, on the other hand, a misplaced semicolon or a variable with one letter off can 

crash a program or cause aberrant behavior. There is no tolerance for close – it has to be exact. 

Thus, trading venues need to have the ability, upon receipt of an aberrant order, to cancel the 

order at arrival in order to prevent that order from entering into the marketplace. For example, 

such a capability would have promptly halted the erroneous trading by Knight Capital that took 

place several years ago in the equity markets.

Even with these improvements, we will still see markets make violent moves, as violent moves 

are not due to market structure as much as they are due to human psychology. Can we describe 

the exact event that caused the flash rally in the Treasury market on October 15, 2014? No, we 

have our hypotheses, our theories. It had been a rough couple of days, people were short 

Treasuries coming into the day, and there were concerns the ECB was going to potentially ease. 

Then markets started accelerating to the upside, and all of us, including myself, wondered what 

news don't we know? 

It takes humans a bit of time to get some confidence that there is nothing that they do not 

know before they step in and take the other side of a move in the marketplace. But compare 

and contrast this, again, to the “good old days.” My career started in September of 1987. What 

happened in the days before the great stock market crash of 1987? I remember the two news 

stories that, 28 years later, stick in my mind: one about Nancy Reagan’s cancer diagnosis and

another about a skirmish in the Persian Gulf involving a U.S. warship. And the equity market in 

the United States crashed by 20-some percent. There will always be an element of human 

psychology in our markets. It is simply what it is. 

Now, let me comment on the narrative that some firms supposedly nobly stand in the way of 

these market moves and commit their capital for the benefit of the end customer. You have all 

heard this speech many times from large banks and other dealers. However, you cannot name a 

securities firm of note that actually went broke in the crash of 1987 buying stocks from 

customers when the market was down 10 percent. I cannot find that firm and you cannot 

either, because no firm does that.

When prices are moving, market makers back away. The more information they have, the 

greater the confidence they have in returning to the market. Therefore, my third 

recommendation relates to post-trade transparency. Post-trade transparency is critical to 

healthy, functioning markets. 

I view my ability to be a market maker in the United States as a privilege. It is a privilege to be 

able to trade in the most liquid market in the world, a well-regulated market, a market that 

defines the epitome of capital formation. It is one of the backbones of American prosperity. 
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One of the key public goods we create at Citadel is billions of quotations a day and millions of 

trades a day that are reported to everybody. Those quotations and those trades create 

confidence in the minds of retail and institutional investors, once again reducing the cost of 

capital and increasing liquidity. I will be so bold as to say it is shameful that we do not have such 

transparency in the single most important market from a public policy perspective in America –

the U.S. Treasury market. 

Every Treasury trade should be quickly and immediately reported to a central reporting facility, 

just as we do in the equities market. This will increase investor confidence. This will help to 

diminish the number of days that we refer to as flash events or crashes or corrections. Nothing 

like information readies people for those difficult moments in our financial markets. And, again, 

I stand here as the single largest market maker in the U.S. equity market arguing passionately 

for transparency. We have immediate reporting to the tape in the equities market. Our time 

from the execution of a trade to the reporting of that trade to the tape is measured in 

thousandths of a second, and that is the appropriate amount of time delay. Not 15 minutes, not 

two days. Fractions of a second. 

Finally, without belaboring the point, there have been a number of speakers today who have 

talked about the importance of cleared repo. I could not agree more. We need a repo market 

that provides credit intermediation among market participants and that helps to reduce the 

amount of activity that has historically taken place within our banking system that is actually 

better conducted through a clearing house. It is important to reduce the bid/ask frictions in the 

cost of financing Treasuries. Financial markets do not trade to the average, they trade to the 

marginal. If the marginal buyer is an arbitrageur, and that arbitrageur does not have access to 

repo facilities in order to borrow and finance bonds, we will impose on U.S. taxpayers a 

needlessly higher cost of raising funds.

So I applaud the dialogue around cleared repo. I believe that the supplementary leverage ratio 

(SLR) is well intended and I would not walk away from SLR. I would embrace a more thoughtful 

alternative, which is to create a repo system that encourages arbitrage activity, reduces market 

inefficiency, and again, serves the interest of all American taxpayers. 

With that, I would just like to conclude by noting that the U.S. enjoys the most efficient markets 

in the world. Citadel trades around the globe across a wide array of products. America's 

markets are not perfect by any stretch of the imagination, but they are the best. Venues for the 

trading of interest rate products in the United States – eSpeed, BrokerTec, CME – really are at 

the forefront of best practices, but this does not mean we cannot do better. 

The discussion on how to improve market structure and resiliency is incredibly important. Every 

market maker who has a long-term view towards their business and towards our economy will 

support you in reform efforts 110 percent. And of all the reforms that I have mentioned, I feel 

most passionately about the need to end market segmentation. Bringing our two Treasury 

markets together, in my opinion, will significantly enhance transparency and fairness and will 

serve the interests of the U.S. taxpayer and investors around the world. 
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We look forward to providing regulators information in connection with the forthcoming RFI. 

And we hope it serves as a catalyst for reform and improvement. 

Thank you so much, Antonio, for giving me the opportunity to speak today.