03.15.2016
By Rob Daly

SEF Order Books Spur Price Improvement

Interest-rate swap traders may view swap execution facilities’ order books as vestigial sources of liquidity, but buy-side traders could witness price improvement if they check order-book liquidity prior to their request for quotes, according a recent Greenwich Associates white paper, entitled Quantifying Interest-Rate Swap Order Book Liquidity.

“In some cases, traders could be saving a couple basis points,which  in this low-interest environment certainly could make a difference,” said Kevin McPartland, head of research for market structure and technology at Greenwich Associates and author of the paper. “From a a fiduciary perspective, asset managers need to ensure that they are doing all that they can to achieve the best execution. Our data suggests that looking at the prices in the order books should become part of the price-discovery process.”

Kevin McPartland, Greenwich Associates

Kevin McPartland,
Greenwich Associates

McPartland drew his conclusion after analyzing approximately 100 randomly selected IRS trades made in July and August 2015, which Greenwich obtained from the DTCC’s swap data repository. The sample included a close to even mix of 10-year outright; 2-,5-, and 10-year butterfly; and 10- and 30-year curve trades.

After comparing the RFQ-execution results with order-book tick-level data, which ICAP and Tradition provided, 30 seconds before and after the original transaction, McPartland found that order books’ midpoint prices were better than the RFQ executions 92% of the time despite the visible notional value at the top of book was visible only 22% of the time.

“Obviously there a lot of caveats,” he added citing market structure issues like the lack of post-trade anonymity and average price as well as  long-stranding relationship concerns. “Those have slowed order-book adoption.”

McPartland also acknowledged that the study’s sample was representative of the market but limited in its diversity. “We focused on only the most liquid benchmark USD swap trades.”

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