Fixed Income Focus | Dan White The aggregate view
Dan White, Chairman and Founder of InterDealer Trading Solutions, spoke to Best Execution about how they have revolutionised electronic fixed income trading and the challenges faced by regulatory change and a tough operating environment.
What has been the main impact of a) regulation and b) the prevailing economic conditions? What we are seeing now is that financial market participants are taking much of their direction from regulation and the need to de-leverage their balance sheets. This has seen a shift of the balance towards just a few firms which are still considered top-tier. Many sellside firms can no longer commit a significant amount of balance sheet to their credit operations, so they are facing increased pressure not to take on significant positions in their trading inventory. Of the positions that they do take on, they are seeing increased scrutiny from the regulators. So there is greater pressure to offload from their trading positions quickly, within a few hours or a few days. Previously, banks had a greater appetite to take on positions and keep them for 30, or 60, or even 90 days.
This has impacted the market because we’ve seen a concentration of liquidity in large amounts among only a
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few players. For the sellside players who are able to respond to large amounts, these are the more lucrative trades for them. It allows them to be more selective about where they will respond to inquiries for customers. The competitive prices in smaller amounts are broadening for a larger group of counterparties. Europe is more electronic trading focused and less dependent on the RFQ than the US, but we are seeing more availability of electronic prices in both regions. We also see more prices on exchanges. Aggregators are also maturing.
As a technology company, what do you see as the main challenges facing the industry?
What we see is a concentration in larger notional amounts only among two or three players, and then an increased number of smaller lots, where in order to get the best price, you have to aggregate from more and more sources. But the prices are out there, and become more relevant, although they are not available using a traditional
RFQ trading protocol. It’s not necessarily true that the best price available in the market can be offered by the traditional dealers. From the point of view of a technology company, the challenge that the industry faces is about gaining access to prices from a broad number of counterparties. That puts pressure on connectivity. It is also about ensuring that the best execution protocols take into account all prices regardless of trading protocol.
How do your offerings address these challenges for a) the sellside and b) the buyside? The key elements are to be able to bring greater connectivity to buyside participants, and to also take into account various trading protocols so you are able to get the best price. From a best execution standpoint, a traditional RFQ will solicit a handful of dealers to come back with the best prices available. However in practice the prices they are coming back with frequently are not as competitive as prices available on exchanges or from other open over- the-
Best Execution | Spring 2013
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