Credit


An article in eFinancial News asking why e-Swaps have yet to take off:

Electronic swaps trading struggles to gain traction

Main points and my view:

– 5-10% of IRS traded electronically (I’d lean towards 5% given these markets) but JPM claim 5-30% for them, depending on market conditions
– Huge gap between the best e-Swaps houses (Barx, DB, RBS and JPM) and the rest (Indeed, far more so than Govt Bonds)
– Price transparency (lack of) and market conditions have hindered multi-dealer vs. single-dealer, as has the above dealer “quality gap” (Multi-dealer plarforms need more price transparency if they truly want to take off, but there are tier-1 dealers and tier-10 dealers, and not much in between)
– Multi-dealer (TradeWeb and LiquidityHub) will overtake single-dealer in time (not in these markets) says Goldman Sachs (what are they up to? 😉 ) and e-Swaps will account for 50% of trades in 18-months time according to Quod Financial (based on what? As they’d say in The Castle “tell ‘im he’s dreamin’!!!”)
– TradeWeb does $7bn in swaps a day (bet EONIA covers a good chunk of that) and have 9 fusion banks PLUS another 6 joing for USD IRS (although those 6 are 6 of the Fusion 9)
– SwapsWire adds value to e-Trading (does it? to the big boys making markets it does. Most tier-2 banks don’t use it or don’t even know what it is!)

Speaking of LiquidityHub, not much news of late, however I was chatting with “a source close to” / “a friend of” the system and they tell me that the number of trades have picked up. The most surprising part is that the bulk of them seem to be coming via Reuters rather than Bloomberg! Seems Reuters have a better GUI, so a client was telling me.

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Same time last year I rambled about how things hadn’t advanced as much as we’d all hoped.

So what was different in 2007?

– LiquidityHub happened (not quite a life changing event)
– Fusion happened (even less so)
– Swaps went “e”……oh, hang on! No they didn’t did they?

So what’s going to happen in 2008 in the world of FI e-trading?

At the risk of sounding a little negative given the current market environment:

– Nothing
– Nothing, and
– Nothing

PLEASE disagree with me, I beg you!

But with banks losing BILLIONS by the Quarter (and more to come despite tonight’s Fed 50bp cut) how are they going to spend what may be required? I mean, according to the Bond King on CNBC tonight, they’re still trying to flog syndicated loans to investors at 95-96c in the dollar…….please!

In 2008 FI e-Trading will be so far down the priority list of ALL banks that any progress is simply impossible. At best more swaps will be traded electronically on 31 December 2008 than were on 1 January 2008…………..see what I did there? 😉

Why do I say this? Well, below are the positives and negatives.

Positive:
Project Fusion: having direct dealer ownership sures up liquidity in the face of the likes of LiquidityHub
– The no. 1 FI e-trading ECN
– Thomson-Reuters merger allows for greater resource access (esp. via Reuters salesforce in Asia and other EM’s)

Negative:
– lower volumes in Govt bonds, their bread and butter, due to the credit crunch
– these volumes are under further threat from Hedge Fund interest in joining MTS
– in over a year TW’s credit offering has failed to impact MarketAxess or Bloomberg
– despite the no. 1 status, TW’s functionality and architechture has failed to advance to any great degree and it is difficult to see this happening in 2008 (see next point). This ranges from the simple (market depth) to the more complex (API to accomodate algo trading)
– Thomson-Reuters merger means TW could get caught up in big firm bureacracy

Overall positive but not without a few things to watch out for.

I was reading the August 2007 issue of Euromoney, including their 2007 Structured Credit Poll results. Interesting to me was the poll for the best Banks in Online Trading Capabilities!

How much structured credit is traded online? Very, very little is the answer. As such, how much can you read into the table?

Anyway, the results:

1. JP Morgan (retained #1 from 2006, only #4 for Price Discovery)
2. Deutsche Bank
3. Merrills
4. Goldman (but #1 for Online Price Discovery – so indicate a great price but never firm it up?)
5. Lehman
6. Soc Gen
7. Morgan Stanley
=8. ABN Amro
=8. Citi
10. Bear
11. Calyon
12. Dresdner
13. Bar Cap (quite poor given their “e” strength, but are better at Price Discovery at #7)
14. HSBC
15. BNPP

Currently the trading of single-name CDS via electronic means is minimal. This is for a number of reasons, such as Bank support and, still, issues of standardisation.

The CDX and iTraxx Indices are clearly more liquid and do trade in small volume over the likes of TradeWeb, MarketAxess and, of course, as a futures contract on Eurex.

What about lists of single-name CDS? Essentially these are traded by Hedge Funds and Correlation Desks on the back of synthetic CDO issuance. There is a huge amount of benefit to be gained by trading these electronically, in terms of efficient pricing and especially post-trade processing of hundred’s of names.

Q-wixx (part of Creditex) and MarketAxess offer this CDS list tool, however has the current credit market – where CDO’s have been fairly and squarely blamed – killed this type of trading for the foreseeable future? Certainly one can’t see too many new CDO’s (or similar securitised debt), synthetic or otherwise, coming out for a while.

For MarketAxess this isn’t a huge deal as they are and plan to remain cash bond focused, but what about Q-wixx? From what I’ve heard and seen it was a clever tool but limited in that it concentrated on one type of trade in credit derivatives only.

With a parent significantly less cash rich than Goldman Sachs, could it be another victim of the credit “crisis”?

Well for starters, my much talked about LBO of Holky’s Mostly is now off the table! 😦

But what does the “Credit Crunch” and related market volatility mean for FI e-Trading?

Volatility is not only the friend of good leveraged investors it is also the friend of any exchange or ECN that makes it’s money from traded volumes. As such, on the face of it, your gaggle of FI ECN’s should be delighted with the recent volatility in the markets.

However, so often large moves in the market are actually driven by liquid derivatives (or sometimes little of anything if liquidity on one side is near non-existant) rather than the underlying asset. So bonds may sell-off by 15 bps on light trade due to the Bund future getting turned over in large size. But generally the likes of MTS, TradeWeb etc in the govy space will have seen enhanced volumes over the past weeks.

What of MarketAxess? It is a credit driven environment at the moment, however you can’t help but think they’d be steady at best. Given the illiquidity in cash credit product.

Now, how about launching a new product into this environment? LiquidityHub would possibly have preferred a more benign environment than this in which to make it’s debut. There is still several weeks left, but will traders look to use a new system during uncertain times?

The world’s pre-eminent Fixed Income buysider tackles the vulgarity of the uber-rich and draws parrallels with the current credit blowout in his latest Investment Outlook. Always well worth a read for those of you interested in current macro market issues.

Being, as I understand, big users of TradeWeb and MarketAxess, I’m still waiting on him to write one on FI e-trading. 😦

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