Historical Data and First-Hand Accounts of Change in FX, US Treasuries and Institutional Equities Demonstrates How Technology and Regulation, or Lack Thereof, Will Cause Swaps Liquidity to Fragment
NEW YORK & LONDON, January 18, 2012 – Despite the fact that swaps execution facilities (SEFs) don’t technically exist yet and swaps market liquidity isn’t fragmented today, swaps dealers tell TABB Group in a new research report that they intend to spend millions to create, implement and market swaps liquidity aggregation systems to their buy-side client base.
According to Kevin McPartland, a TABB principal, director of fixed income research and author of “Swaps Liquidity Aggregation: Best Execution to Product Selection,” liquidity in the most liquid parts of the swaps market is going to fragment. “Whether there will be three or as many as 10 SEFs per asset class remains unclear, but finding the size you need at the right price will become less about who you know and more about the quality of your aggregation technology.”
The new report is based upon conversations with swaps dealers, proprietary trading firms, hedge funds, swap-execution facilities and technology providers. It examines historic precedent for market automation and liquidity fragmentation and the impact of proposed regulation and technology innovation on swaps market liquidity. The report also examines approaches being utilized to re-aggregate swaps liquidity via SEF aggregation technology.
Most swaps dealers and some forward-looking technology providers are already building aggregation system solutions, a step not taken without risk, says McPartland, explaining that locking down budget to solve a problem that hasn’t yet presented itself is no easy task given ongoing layoffs and the global economic crisis. “Swap trading desks are asking their budget committees for tens of millions of dollars to build technology to aggregate liquidity in a market that isn’t actually fragmented – yet. It’s a tough sell, but it shouldn’t be. By providing these new liquidity-seeking tools to their buy-side clients, dealers can fight to maintain the screen real estate and relationships they’ve spent years obtaining.” TABB Group research shows that vanilla interest rate swaps (IRS) and index credit default swaps (CDS) will see the widest adoption of these new aggregation solutions.
Creation of liquidity aggregators will be easier said than done, warns McPartland. “Aggregating request for quote (RFG) and order-book markets into a single view is no easy feat. Automating the inherent complexity of an experienced swaps trader’s decision-making process requires technology akin to artificial intelligence. And we can’t ignore regulatory uncertainty. Even if the final rules are passed early in 2012, industry lobbying and a change in the White House in 2013 could see the rules shift yet again. But the swaps market will fragment. The need for SEF aggregation is serious and it’s not going away.”
The 24-page report with nine exhibits is available to TABB Research Alliance Fixed Income clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to firstname.lastname@example.org.
About TABB Group
TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets. Founded in 2003 and based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb, TABB analyzes and quantifies the investing value chain from the fiduciary, investment manager and broker, to the exchange and custodian, helping clients gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online capital markets community currently comprised of 10,500 members from buy-side and sell-side firms, exchanges, regulatory agencies, academia, consultants, vendors and media, focusing on issues covering current industry-wide topics.