SEF Order Book Pricing Can Rival RFQ for Interest Rate Swap Trades

New Greenwich Associates Report Urges Institutional Investors

To Use Order Books in Tandem with RFQs


Stamford, CT USA —  A new quantitative research report from Greenwich Associates, Quantifying the Benefits of Order Book Trading to the Swaps Market, suggest that while RFQ platforms will remain a top buy side execution source, available order books should become part of the best execution process going forward.

The research, which examined USD outright, curve and butterfly trades, found order books performed better in certain scenarios.  “Smaller, outright benchmark USD interest-rate derivatives trades on low volatility days are a particular sweet spot for order books,” says Kevin McPartland, Head of Market Structure and Technology Research at Greenwich Associates and author of the report.

The study included over 100 investor interviews and found that SEF order books provided price improvement over trades executed via RFQ in a vast majority of cases examined. However, in over 70% of those cases the displayed size available was insufficient and would require additional work up to achieve overall trade objectives.

Conversations with institutional investors also found however, that a number of roadblocks remain.  Institutional investors, who now trade 60% of their interest rate swap (IRS) volume on SEFs, want to maintain their close counterparty relationships via request for quote (RFQ) interactions.  In fact, 56% of investors stated their preferred protocol was name-disclosed RFQ.  Regulatory and workflow issues, such as the ability to process a group of trades at a single average price, and a lack of post trade anonymity, also discourage asset managers from trading interest rate swaps via an order book.

For asset managers who act as a fiduciary for their clients however, ensuring that they achieve best execution is not only important, but required.  As such, simultaneously examining liquidity in the accessible order books should come to be seen as best practice.

Customers can access the full report here.

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