Tower Research expands fixed-income ETF pricing to 500 funds

Tower Research Capital, a New York-based quantitative trading firm, has expanded the number of US-listed fixed-income exchange-traded funds it actively prices from about 30 nine months ago to more than 500. People familiar with the firm’s strategy provided figures showing it aims to price the full US-listed fixed-income ETF universe of more than 1,000 funds.

The firm has broadened its market-making activity beyond high-frequency equity trading to include bond-focused ETFs that hold government, corporate, municipal and securitised debt as well as mortgage-backed securities.

Fixed-income ETFs offer exchange-traded access to bond markets where many individual bonds trade over the counter, can be fragmented or thinly traded. Market makers support liquidity (read more about liquidity in finance) by creating and redeeming ETF shares and trading the underlying bond portfolios to keep market prices close to funds’ net asset values.

The global fixed-income ETF sector has grown to more than $3 trillion. Higher yields after central bank rate increases and increased electronification of bond trading have supported inflows into these products. More than 2,500 fixed-income ETFs are listed globally.

Banks have historically been major fixed-income market makers. Proprietary trading firms have increased their presence by using high-speed technology and different approaches to capital and risk. Jane Street and several large banks are established participants in ETF market making.

Tower has added medium-term quantitative strategies that hold positions for several days or weeks alongside millisecond-level trading. Those strategies are intended to help the firm manage the liquidity and hedging needs of bond ETFs, which require valuing a wide range of securities and managing inventory across thousands of instruments.

Tower declined to comment on its plans. The firm’s broader coverage increases competition among firms that price and hedge fixed-income ETFs.