Hedge Funds

I’ve just spent the past two-days at the SIFMA Conference in London. Unlike previous events I must say I found the mood at this one a bit flat. Understandable given my previous post regarding the near-future for FI e-trading.

Chatting to friends and colleagues from the Banks, Vendors and Buyside (Hedgies and Real-money) confirms the feeling that 2008 will be the year of minimal growth in terms of e-Trading development in the FI world.

Panelists were more upbeat, without really saying much, as always. Kudos to the “compere beyond compare”, Holky, for throwing a few curve balls into the session he ran. Unfortunately he told me that the lighting and acoustics meant he was flying blind and deaf on stage! We should even forgive his shameless plugging of his blog, without mentioning mine! 😦

Anyway, the “highlights” for mine:

– Stunned silence from the vendor panelists when asked “who other than yourselves have come through the market turmoil with your reputation in shape?”

– Buyside panel blaming their OMS for why they don’t trade more swaps, in general, and why they do very little electronically. Thus publicly confirming what I said all last year! Although Fidessa LZ tell me they have a great IRS module……hmmmmm

– The CDS panel…(pause)…NOT! If it was two-years away last year, it is still two-years away now!

– Real-money need multi-dealer (compliance, regulation etc), Hedgies were burned by multi-dealer during the credit crunch (poor pricing, no pricing) and now favour between 2-4 single-dealer applications.

– DB’s Kevin Arnold must read this blog, as he repeats my tier-1 of a “German bank, American bank and a British bank”……unless he meant Commerz, BOA and Lloyds? 😉

I avoided the FX sessions as I didn’t want to hear a panel of people saying how many years they were ahead of the FI market in terms of e-trading. FX is a simple, simple market! THAT’S WHY!!!!!!

I can’t help but think SIFMA need to shake things up a bit next year, or we will not see a 5th one. It will be at a new venue, but they need to try and get a few new topics and a few new faces.

In these times people just can’t dedicate the time and money to what is essentially a social gathering with a bit of business thrown in.


It has been some time since I’d seen Autobahn (the stand alone version, not what runs via Bloomberg or Reuters or whatever) in action. And I’ve not really ever had a good look at what they offer in IRS.

Well I can say I’m quite impressed. It is a single-dealer platform sure, but it really is the best thing out there in terms of functionality for the e-Swaps market place (sorry to tell you SwapsStream) and, along with BARX, product coverage. I’m talking Outright, Curve Spreads, Butterflies, 18 currencies, RFQ, Streaming Click and Trade, Limit Orders. And the best of all? Unwinds. You find the deal (whether dealt on the phone or electronically) you wish to unwind and open a ticket to unwind the swap there and then. Add in trading API, STP and even the simplicity of e-mail confirmations.

Being single-dealer, albeit one of Waratah’s Tier-1 FI e-Trading dealers, is a massive problem. Multi-dealer is undoubtedly what clients such as Hedge Funds and Tier-1 Funds want. But Deutsche Bank are hardly going to invite their competitors onboard, are they? 🙂

So what to do? Do the likes of LiquidityHub and TradeWeb (sorry to leave you out SwapsStream) simply copy the functionality? No trade mark on what Autobahn does, it simply replicates phone trading in a more efficient manner…the whole point of e-Trading.

Indeed TradeWeb does offer curve trades and butterflies. But it remains a Request For Quote driven government bond platform running on architecture from the late 90’s/early noughties. Although I hear they’re looking to jump on the Request For Stream (RFS) bandwagon after Fusion went ahead late last year.

LiquidityHub appears to want all functionality to fit into the RFS model, which counts out the vast majority of it’s Price Makers from being able to do broken dates, unwinds and also butterflies etc.

Time will tell, but certainly a multi-dealer platform that offers Autobahn-like functionality and products would go down well.

From Dow Jones, the first dealer pulls out in protest against Hedgies and prop Houses potentially being allowed into MTS:
Credit Suisse Group decided to stop making markets in European government bonds on four trading platforms operated by MTS SpA, protesting MTS’s decision to open trading to hedge funds.

The Credit Suisse decision could pave the way for other banks to shift their bond market-making businesses away from MTS as platform requirements ease. Rivals include Bloomberg LP, Eurex Bonds, ICAP PLC’s BrokerTec platform and Espeed Inc., which is an affiliate of Cantor Fitzgerald LP.

The move comes at a sensitive time for MTS, which will face greater competition from these platforms next year when the Belgian and Dutch government debt agencies plan to relax their primary-dealer rules for the first time to allow banks to choose which platforms on which to make markets.

Some government debt agencies, such as in Belgium and the Netherlands, have required banks to trade on a platform run by MTS in order to centralize liquidity and make it easier to monitor dealer performance. Dealers have been lobbying European debt agencies for several years to be able to trade on the platform of their choice in order to create competition between them on fees and services. Some agencies are now responding.

Credit Suisse switched last month from operating on MTS France and MTS Spain as a price maker and became a price taker, according to Stanislas de Caumont, managing director of fixed income at Credit Suisse. The bank has switched to making a market in French bonds on BrokerTec and in Spanish bonds on Senaf, the local platform for Spanish debt, Mr. de Caumont said.

Credit Suisse also has told the Belgian and Dutch debt agencies as well as MTS Belgium and MTS Amsterdam that it intends to stop market making on those platforms when they allow dealers to choose their trading venue, he said.

Credit Suisse said Friday it was prompted to move its market-making business because of its opposition to MTS’s plans to allow nonbanking entities, such as hedge funds and proprietary trading firms, to trade on its EuroMTS benchmark euro-denominated bond-trading platform.

The bank, as with some other primary dealers, believes hedge funds could exploit the European market-making system. Mr. de Caumont said the funds aren’t interested in providing liquidity in the bond market by buying and selling bonds when counterparties need them to, but instead simply want to make money with high-frequency automated spread trading.

“Given MTS’s push to open its EuroMTS platform to hedge funds, we feel better fulfilling our quoting obligations on another platform that is restricted to primary dealers,” Mr. de Caumont said.

MTS said it is keen to work through banks’ concerns about the new market, which will be subject to rules that will prevent exploitative behavior. “Feedback from the banks is very important to us,” spokesman Boris Nadenic said. “We understand that they have questions, and we are working with the banks to structure a market that meets all participant needs.”

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

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)

– 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.

FT reports that MTS have now decided to include “non-bank entities” and give them “broker-dealer status” on EuroMTS.

I can only assume they’ll not be able to access the local MTS markets e.g. MTS Italy etc.

I guess the ball is now in the EPDA’s court. Will be interested to see their response, although MTS claim their members have been consulted as part of the process.

A brief piece here about access to inter-dealer markets for Hedge Funds. Now widely practiced in FX, via Prime Brokerage offerings such as on ICAP’s EBS and Reuters TBS, but resitance remains in the band market.

Cantors makes some odd comment about access for non-bank clients on eSpeed using Algos but not Hedge Funds……

In some way connected to my previous posts on the effects of recent market volatility on Fixed Income e-Trading and Hedge Funds on MTS, Bloomberg have a piece today stating that US Tresury volatility is at 3-year highs.

“The retreat by so-called black-box traders and hedge funds caused orders for Treasuries to drop as much as 80 percent, said Mark Ficke, senior managing director at ESpeed Inc., the second- biggest interdealer broker.”

Now they measure liquidity here in terms of size, normal order size of $500m is now $100m in 2-year notes. However, it looks like my view that market volatility should mean increased volumes may not ring true on eSpeed in the States…….but the article mentions that Fed data indicates August averaged $767 bn a day in trading, a record. Then a trader from Mizuho in The States screams “I JUST WANT LIQUIDITY WITH MY VOLATILITY!”.

So volatility is high, volumes are high (so I was right, just eSpeed is down due to algo seizure) but liquidity is low.

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