SEF Launches Central Limit Order Book

Terry Flanagan

TeraExchange to offer CLOB in addition to voice-assisted trading.

Swap execution facilities are taking different approaches to the way they match orders, utilizing a mixture of voice-trading, requests for quotes (RFQs) and central limit order books (CLOBs).

To some extent, they are hedging their bets as regulators hammer out rules implementing provisions of the Dodd-Frank Act dealing with mandatory execution of standardized OTC swaps

TeraExchange, a new OTC derivatives trading venue, is preparing to launch a CLOB for OTC cleared derivatives, which will go live by year-end.

The initiative positions TeraExchange to seize first mover advantage as sweeping regulatory reform reshapes the world of trading and clearing OTC derivatives.

The thrust of the rules being formulated by the SEC will be to give market participants greater choice in choosing the method of execution for OTC swaps (e.g., voice-based, RFQ, and CLOB).

“Under the current rules and guidelines, they already have,” Christian Martin, CEO of TeraExchange, told Markets Media. “Market participants have greater flexibility in choices, but very few companies other than us are stepping up to offer a central limit order book in addition to voice broker services, and we believe we are the only one that incorporates comprehensive pre-trade credit checks. “

“The rules are not extremely prescriptive, but that doesn’t change the overall mandate of pre-trade transparency and post-trade reporting,” he said.

TeraExchange has been optimized for trading OTC derivatives.

“Our unique value derives from a solution which seamlessly integrates a central limit order book for all OTC cleared derivatives with full pre-trade credit checks, voice assisted trading, comprehensive analytics and simultaneous cross-asset execution of related and underlying exchange-traded products,” said Martin.

The platform features integrated cross-asset trading, analytics, and voice-broker assistance. Risk controls combined with centralized clearing align with regulations to boost transparency and reduce systemic risk.

While some have forecast a shakeout in the budding SEF industry, over the longer term, SEFs will be competing with inter-dealer brokers such as ICAP, GFI Group, Tullett Prebon, BGC Partners, and Tradition.

“We’re in early days right now, but there may be some consolidation over time,” Martin said. “Where we see the real shakeout is with IDBs once they lose the liquidity from the dealers, their only real market.”

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