In 2004, markets cannot operate on the basis of a gentleman’s agreement. That’s why – love it or hate it – Citigroup’s e11bn sale of eurozone sovereign paper that sent prices down, allowing the bank to buy back €4bn-worth at a lower price half an hour later, should not be the subject of an outcry from banks that lost money.

The trade was the result of a savvy and well-organised game plan that could only be executed by a major player. Dealers caught on the wrong side must review their trading strategies and whether they should be in the market at all. But they should not be bleating about the game being unfair or expect regulators to step in to take their side. There are, however, two important issues in relation to the EuroMTS electronic trading platform on which the trades were done: the way EuroMTS forces market makers to make prices, whereas on rival platforms they have the freedom not to if they wish, and the link between primary and secondary market trading and issuance. If there is a need for investigation, it is in these two areas. When the sovereign euro markets were first born, the ‘forced liquidity’ of EuroMTS was useful in building up markets but may not be needed now. On the other hand, the fact that all the deals were completed proves the robustness of the system. Whatever the outcome, EuroMTS’s decision to respond to the problem by imposing restrictions is a step in the wrong direction. For a while, there has been an issue about whether electronic platforms should be privately-owned and run for profit or operated as utilities. EuroMTS falls into the latter camp, with ownership of the holding company, MTS, spread among banks and brokers and the profits used to reduce transaction fees. Belgium and Portugal hold minority stakes in their national MTS systems and, across the board, banks that trade heavily in a sovereign’s paper may be awarded government mandates. Regulators should be looking for answers here rather than scrutinising Citigroup. For Citigroup, the issue is whether it suffers reputational risk that hurts the bank on the underwriting side. In this case, the sovereign trade may prove costly even though, from a purely market perspective, it was perfectly legitimate.

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