Volatility Supports Voice

Terry Flanagan

The recent spike in market volatility — the CBOE Volatility Index touched a three-year high last week — has caused customers of inter-dealer brokers to revert to voice trading, which co-exists with electronic swap execution facilities.

“Inevitably, in times of high volatility you do see people migrating back to the voice businesses,” Shawn Bernardo, CEO of Tullett Prebon’s tpSEF, told Markets Media.

Tullett recognizes the value added by voice brokers, Bernardo said, and the firm continues to operate an Introducing Broker where voice brokers reside and that affiliated Tullett IB is a participant on the SEF. As such, Tullett as a company provides its customers the ability to access the SEF via an IB (affiliated or unaffiliated) where they can speak to a broker who will then introduce the trade to the SEF on the customer’s behalf, or that customer can execute directly on the central limit order book.

“In my opinion a large portion of the trades going through SEFs currently have a voice component to the trade,” Bernardo said.

Tullett allows customers to utilize the service of a voice broker in an Introducing Broker to arrange transactions and then hand it off to the SEF for execution. Whether the trade comes to the SEF via an IB or is entered directly by the customer into the central limit order book, all of the trades that we execute are inevitably executed electronically.

“I believe if you spoke to other IDB SEFs regarding last week’s volatility, they would say that their level of pure electronic executions has gone down and those involving a voice component have increased,” Bernardo said.

Tullett has clients streaming markets to tpSwapDeal, and a client can execute directly on the central limit order book. In times of low volatility it is easier to execute electronically and maintain tighter streaming markets on the screen.

“As products become more ‘commoditized’, you will see more fully electronic executions in that particular product,” said Bernardo. “The more complex products will require voice broker involvement to source liquidity and arrange transactions.”

The purpose of the voice broker is to facilitate transactions. and the way they accomplish that is by disseminating the prices to all of their clients in an attempt to match buyers and sellers. So long as these voice brokers reside in an IB they are able to source liquidity on behalf of their customers, as they have always done, and any resulting trades are submitted to the SEF and are executed in accordance with the SEF’s rules.

“So, for example, any requirement to expose one side of a required transaction crossed in the IB and submitted to the SEF for execution to the SEF marketplace would apply to those trades, thereby providing the transparency and access to prices envisioned by the rules,” Bernardo said.

The tangible benefits to trade electronically are that it generally costs less to execute and it creates efficiencies in trade execution and processing. “The cost of implementing and accommodating the Dodd-Frank legislation has probably cost market participants hundreds of millions of dollars,” said Bernardo.

Featured image via zhu difeng/Dollar Photo Club

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