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HFT firm Virtu in breakthrough talks with €260bn fund manager

Monday, October 17, 2016

Virtu Financial is in talks to trade on behalf of Union Investment, a major German asset manager, in one of the clearest signs yet that high-frequency trading is becoming widely accepted by Europe's traditional investment community.

The deal, which would see Virtu execute trades on an agency basis for Union in Europe, is set to be one of the first of its kind in the region bringing together a leading electronic market-maker and an asset manager with more than €260 billion in client assets.

Partnerships between such firms and the buyside would have been highly unlikely just a few years ago given concerns over high-frequency trading. But weaker trading volumes and new rules such as the EU's revised Markets in Financial Instruments Directive are forcing a rethink of traditional models.

Christoph Hock, head of multi-asset trading at Union Investment, said the institution already had a long-term partnership with Virtu in the US and was in talks "very actively" to extend that relationship in Europe.

"We expect to onboard them as trading counterpart and agency broker in the coming months to utilise their technology and trading strategies. We also consider to make use of their analytical tools to measure execution performance", he said.

Hock has already been a vocal supporter of using non-bank trading counterparts. In November 2015 he said the firm was onboarding KCG – the electronic market-maker and agency broker – and added that more than half of the firm's trading activity in exchange-traded funds already comes from non-bank firms Jane Street and Flow Traders.

He said such firms would "definitely not replace traditional brokers", but would rather be an "additional highly valuable source of liquidity". He added: "Across all asset classes, it is our highest philosophy to achieve best execution and that means also accessing new forms of liquidity and market participants."

Virtu, which revealed in its initial public offering documents in April 2015 that it had it lost money on only one day between 2009 and 2014, said in February that it intended to diversify its revenues by letting other firms use its technology following successful testing of the service with T Rowe Price in the US.

Speaking in February, Doug Cifu, Virtu's chief executive, said: "If there’s an opportunity to use the assets that we have to generate incremental revenue, I’m going to do that.”

In August, Virtu said it had signed a three-year agreement with JP Morgan to help the bank trade more efficiently in the US treasury market.

Anish Puaar, a European market structure analyst at Rosenblatt Securities, said: "These types of partnerships could become more popular as investors seek out different sources of liquidity. New Mifid II rules that will unbundle research and trading fees should also encourage buyside firms to seek out alternative execution providers to large investment banks."

Hock added that Union might "in the long run under Mifid II" access Virtu's proprietary, market-making liquidity.

This would most likely happen if Virtu were to register as a systematic internaliser under the new rulebook. The SI regime was created under the first Mifid and designed to capture client orders that a firm completes using its own capital. The model is being strongly promoted under Mifid II.

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