Non-Traditional Market Makers Divide SEFs


Since swap execution facilities introduced agency access, it has opened the door open for hedge funds and other market participants to access interest rate swap and credit default swap markets, and has concerned other about what it will do to market quality.

In the CDS market, MarketAxess CEO Rick McVey does not believe that nontraditional market markets makers will displac existing market makers anytime soon.

“In terms of market-making commitments, my opinion is that it still rests with the top six dealers,” he explained during a CEO panel at the SEFCON VI conference in New York. “They’re the ones that have made the investment in technology for market making from the outset, and they continue to provide pricing on the platform.”

However, he has seen a non-traditional market makers make inroads at the margin of the market.

Rival Bloomberg SEF has approximately 10,000 authorized traders, which is Bloomberg’s term for agency access, according to George Harrington, global head of fixed income, currency, and commodity execution at Bloomberg.

“Certainly on our platform, you see liquidity providers that are accessible,” he said. “They’re there and they’ve been aggressive and have done well in that space.”

It’s this aggressiveness that McVey fears that will drive long-only buy-side clients away from the SEFs.

“You do see the use of alternative instruments to hedge credit risk, primarily exchange-traded funds and dual rate-return swaps,” he added.  “There also resigns that certain people would like to avoid trading on SEFs to hedge their risk due to the regulatory burden.”

Yet in the IRS market, neither BGC SEF or Tradeweb seem all that concerned over what impact nontraditional market makers with have on their markets.

Non-traditional market makers are wadding into the space, according to James Cawley, the CEO of BGC SEF. “I wouldn’t say there’s a line around the block though.”

Douglas Friedman, general counsel at Tradeweb Markets concurred with Cawley. “Tradeweb has offered agency access on its SEF since February 2014,” he added. “We’ve seen some, but relatively modest uptake on that.”

Friedman attributes clients’ modest use of agency access to their preference to connect to the SEF directly. “Once they understood what SEFs were going to do and not do, they found a fairly traditional method of execution.”

Cawley acknowledges that some SEF clients were nervous when the nontraditional market makers started to show up. But after inviting a number of clients in and demonstrating how difficult it is to trade in the swaps markets, it allayed much of their concerns, he added.

The nontraditional market makers are trading by the same rules as everyone else, Cawley pointed out. “They’re not looking for anything new or different.”

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