SEFs: Through the Looking Glass
Swap execution facilities are required by law to maintain an order book, yet only a few have chosen to make that order book accessible electronically. One of them is interdealer broker Tradition, which operates both a central limit order book and an RFQ (request for quote) system on its Trad-X SEF.
The inter-dealer world operated for many years on a voice-to-voice basis. A few years ago, Tradition introduced a central limit order book including a full implied engine with liquidity support from 12 large global banks.
“In terms of dollar swaps, there are really only two central limit order books doing any material volume, one of which is Trad-X,” said Dan Marcus, head of Trad-X. “There isn’t anything equivalent in the dealer-to-customer world. Market participants in that style of SEF environment primarily operate on a request-for-quote basis.”
The Trad-X platform is fully integrated with its voice business. “From a SEF perspective, Trad-X operates as the central limit order book within the SEF,” said Marcus. “Our voice brokers interact with it both in terms of inputting voice received orders from participants into the CLOB, and as part of our RFQ process. All of our dollar voice brokers sit within our SEF.”
According to SEFView, through the first six weeks of MAT trading, Bloomberg, which operates a dealer-t0-customer SEF, leads in interest rate and credit derivatives, while Tradeweb is second in the co-called D2C space. Within the dealer-to-dealer segment, Tradition, ICAP and Tullett Prebon are bunched together. “We are one of the leading interest rate swap SEFs, and a lot of that success stems from the fact that we operate Trad-X,” said Marcus.
A central limit order book is new in this particular segment of the market. “It’s only been going a couple of years for dealers and it’s certainly something very new for the buy side,” Marcus said. “Of course, with impartial access requirements, we have to provide access to the buy side to our central limit order book which is a transition that is happening but presumably will take a bit of getting used to for non-bank participants.”
Tradition’s traditional client base for interest rate swaps has been the 50 largest banks in the world, not the buy-side. “From my interaction with them, which is a result of significant inquiries, what has been interesting is really sort of explaining to the buy side how the central limit order book works, with voice interaction,” Marcus said. “It’s really that the buy side has got a little bit more choice now in the way it executes than it had before. Irrefutable multi-lateral depth of liquidity has never been on display to the buy side in this way before.”
To fully complement the order book trading, Trad-X operates as a traditional inter-dealer-broker SEF, in that it has voice brokers trading on an RFQ basis that might provide a better price than is available in the order book.
“From their perspective, I guess what’s very interesting is, that on an RFQ basis, you put in a request for a quote, and what comes back from one or more banks is basically a price or prices which they can compare against,” Marcus said. “Whereas on a central limit order book you have a spread between best bid and offer, and to execute that, you have to cross that spread. In environments like Trad-X, you have the advantage of a combination of irrefutable pricing (CLOB), depth of liquidity and full voice RFQ support to provide a fully dynamic flexible offering.”
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