The hard-charging 55-year-old chief executive of Cantor Fitzgerald and affiliate BGC Partners, who rebuilt the company after it was devastated by the attack on the World Trade Center in 2001, is betting a significant increase in speed will transform the process of buying and selling government debt in the $14tn Treasury market.
“We think the marketplace that exists today in US Treasuries has dumbed down,” says Mr Lutnick, whose return with a new electronic trading platform comes four years after he sold the first, eSpeed, to Nasdaq for $1.2bn. “I don’t talk about how we do it, but we expect to be materially faster than all other platforms,” he told the Financial Times in an interview.
Since the sale of eSpeed, there has been much talk in the industry that Mr Lutnick would return, particularly as Nasdaq’s share of Treasury trading has wilted. The expiry of BGC’s non-compete clause with Nasdaq has opened the door for this aggressive dealmaker.
The challenge he faces is a sizeable one. Nex’s BrokerTec has hoovered up 80 per cent of the market that facilitates bond trades between banks, dwarfing that of eSpeed and Dealerweb.
The idea that big buyside firms are going to come in and trade mano-a-mano with high-frequency trading firms shows a lack of knowledge of the business
The new platform, known as FENICS UST, will be showcased at a fixed-income conference in Boston this week, and its arrival comes at a crucial juncture for Cantor, one of Wall Street’s longstanding private partnerships.
One of 23 primary dealers that help the US sell debt, Cantor has been expanding in areas such as commercial real estate. In January, it hired Anshu Jain, formerly co-chief executive of Deutsche Bank as president. More recently, the firm fired up the rancorous debate over the ties between Washington and Wall Street after it emerged that it was paying President Barack Obama $400,000 for a speech later this year.
And just as Cantor transformed the government bond market with the launch of eSpeed in the 1990s, Mr Lutnick believes another big, disruptive opportunity awaits in the world’s most important financial market. How will he do it? “Science,” he cryptically replies.
The initial plan for elbowing his way back into the Treasury market involves targeting banks, high-frequency traders and other professional trading firms that make prices on existing electronic venues.
“You need to have that group utilising your product,” he says, because through the transactions of that group Mr Lutnick says he will collect data that can inform further trading activity. “Without that you cannot get the eyeballs of the world to look at you.”
Every price on the FENICS UST screen will be executable at that price, rather than requiring further confirmation. Combined with faster communications and software, Mr Lutnick expects participants on the platform to offer more competitive pricing and thereby win more business.
“It requires a quantum leap of speed to make that available,” he says. “It needs to be faster. It needs to be more precise. It needs to be able to reach more of the clients in a turnround time that includes all network activity.”
The native of New York’s Long Island cites the current difference, or spread, of one quarter of 1/32nd between buying and selling a two-year treasury note on current platforms. “I think that is too wide,” he says — a point that many high-frequency traders also believe.
Faster trading will, so the theory goes, allow prices to disseminate among participants more quickly, making them better informed and narrowing the difference between the price to buy and the price to sell. However, that is an ambitious goal as even HFTs admit finding an edge via speed is becoming harder.
If the platform captures its initial set of users, he will target asset managers. He rejects the idea — touted by some in the marketplace — that asset managers and other “buyside” firms will ultimately become liquidity providers and that all participants will trade with each other, whether it be bank to bank, bank to client or client to client.
“The idea that big buyside firms are going to come in and trade mano-a-mano with high-frequency trading firms shows a lack of knowledge of the business.”
Instead, the FENICS UST strategy is to allow banks and high-frequency traders to make prices directly with clients, providing them with a constant stream in larger “block” sizes. The new venue will also be able to integrate directly with big asset managers’ own technology — a sticking point for Pimco that recently prompted them to consider moving trades away from Bloomberg towards Tradeweb.
Spun out of Cantor in 2004, BGC benefits from its established trading infrastructure and presence in other markets, like interest rate swaps. It also has its own settlement capabilities, which has proved to be a stumbling block for recent upstarts seeking to challenge the status quo of current bond trading platforms.
“Data drives success,” says Mr Lutnick. “That is how we began our success with eSpeed. It was always based on the data.”