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SEF Consolidation Likely as Volumes Slowly Increase

With 21 swap execution facilities, and slowly increasing volumes, the marketplace is perfect for consolidation.
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SEF Volume
SEF volume for the week of June 23-27
SEF volume for the week of June 23-27

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IvySchmerken
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IvySchmerken,
User Rank: Author
9/2/2014 | 9:09:47 AM
Re: Trade Compressions
You raise an interesting question: I am not sure of the difference between portfolio compression at the SEF level and how that works differently from portfolio compression at the clearing house level. I would assume that at the SEF level, portfolio compression is netting/terminating the positions that someone has at a particular clearing house against positions held by users of that same SEF. Perhaps trade compression at the clearing house level more broadly includes users across all SEFs that have positions at a given clearing house?


According to a February 2014 report from ISDA focused on interest rate derivatives" 

...significant progress has been made in reducing the size of the market through portfolio compression. Compression has helped to reduce the IRD notional outstanding by approximately 30 percent since 2009.

 

 
kiranpawar
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kiranpawar,
User Rank: Apprentice
8/29/2014 | 7:11:43 PM
Trade Compressions
Interesting to watch SEF platforms offering trade compression feature. How would that work in tandem with CCP compression services?
IvySchmerken
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IvySchmerken,
User Rank: Author
8/27/2014 | 10:39:17 AM
Re: Consolidation surprises?
There could be surprises during the consolidation wave. Perhaps some of the exchanes will acquire some of the SEFs? I don't think any startup SEF with low volume is going to have an easy time grabbing market share from a larger, established SEF. We have seen Bloomberg and Tradeweb take teh lead in the D2C [dealer to client space). Both have large distribution on the buy side and connectivity to dealers, swap data repositories (SDRs) and central clearing counterparties (CCPs). This is not to say that someoe else, including a start up can't make inroads into their market share. I think if a startup has deep pockets or gets a consortium to buy into them, they could grab share but will need to offer value-added functionality and/or  slash fees.
IvySchmerken
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IvySchmerken,
User Rank: Author
8/27/2014 | 10:13:24 AM
Re: Buy side fees
Buy side is getting transparency into pricing through the SEFs. Each SEF has an order book and posts bids and offers. The CFTC is also requiring the buy side to get three prices via the RFQ (request for quote) method. This is up from one quote previously. However, institutions sometimes want to trade with one dealer to prevent information leakage. The more prices they request, the more they raise the chance of price leakage. Although they want the best price, they may compromise to keep their trade confidential.
IvySchmerken
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IvySchmerken,
User Rank: Author
8/27/2014 | 10:09:46 AM
Re: Buy side fees
Yes, the SEC is pushing for more transparency into the corporate bond market for retail investors and institutions. They have post-trade transparency through the TRACE feed so they can see the last trade. But investors also need pre-trade transparency.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/26/2014 | 5:54:50 AM
Re: Buy side fees
Yes, I think the buy side knew, but the transparency into pricing is vital for any market to succeed. There have been too many instances with opaque markets that eventually cause problems.
senthilr14
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senthilr14,
User Rank: Apprentice
8/25/2014 | 12:24:04 AM
Buy side fees
What is important is not about Buy-side paying a fee for a SEF trade, but Buy-side having more visibility on the price of instruments and paying less overall. Earlier I wonder if they really knew that they were getting the best price.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/22/2014 | 7:09:16 AM
Consolidation surprises?
I wonder if there will be any surprises during the consolidation wave that will likely come. For instance, will a low volume, but well funded start up or new entrant in the market make an attempt to grab the business of a larger volume SEF from a company that may not really want to be in the SEF business? It could get interesting.
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