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SEF Trading Volumes Emerging From Summer Doldrums

Tradeweb's SEF saw a twenty-fold increase in interest-rate derivatives trading volume in the first two weeks of September, while Tabb Group looks for signs of summer doldrums turning around.

Despite the summer doldrums of SEF trading in interest rate swaps, activity in early September is showing signs of a rebound as traders conduct more of their business on the electronic venues.

Tradeweb Markets announced Wednesday that average daily volume on its TW SEF for trading of interest rate swaps increased 20-fold to more than $20 billion in the first two weeks of September, over the first two weeks of trading on SEFs in October 2013.

The number of clients trading derivatives on its SEF has grown by 400%. In the first two weeks of September, Tradeweb said, more than 110 institutional derivatives trading clients executed more than $230 billion of global interest swaps on its request-based SEF.

"SEF trading has absolutely exploded on platforms like Tradeweb since they launched less than a year ago," Lee Olesky, chief executive officer of Tradeweb Markets, said in a press release. Tradeweb launched its SEF on Oct. 2, 2013, with a request for quote market and an order book for its dealer-to-client platform, as well as an anonymous central limit order book on DW SEF, a dealer-to-dealer platform.

While Olesky said "the acceleration of electronic trading iof derivatives on SEFs in the last several months has been staggering," does this mean that the summer slowdown is over?

In a report also posted Wednesday, Tabb Group analyst Colby Jenkins wrote that SEF volumes experienced severe drops in July and August, which put a damper on their growing momentum. Total notional volume traded on-SEF for cleared interest rate swaps dropped 26% from $2.67 trillion in June to $1.98 trillion in August. According to Tabb, August was the second consecutive month of decreasing SEF activity and the second-lowest month for on-SEF volume since after the Made Available to Trade (MAT) determinations went into effect in February.

The recent outflow in SEF activity was not concentrated in a few major SEFs, according to Jenkins; it has been relatively consistent across all SEFs for the past four months.

Post-summer slump: Rates volumes on the rise
Despite the summer slump, SEF volumes have been "steadily on the rise since the MAT determinations went into effect last February," Jenkins wrote. Notional volumes in rates set a record in June by reaching almost $2.5 trillion, according to Tabb. Dealer-to-dealer (D2D) platforms announced record volumes in electronic central limit order books. Dealer-to-dealer (or client-facing) platforms captured 30% of total SEF trades, versus 8% in early 2014, Jenkins wrote.

Regardless of the summer slump, Tradeweb and Tabb agree that momentum for rate trading on SEFs has been building sine the MAT determinations for standardized swaps went into effect in February. "Market share for electronic trading of interest-rate derivatives has increased from less than 10 percent of overall volume before SEFs to about half of all IRS trades today," Olesky said in the release.

As clients integrate with SEFs, Tradeweb said, the phased-in approach taken by the Commodity Futures Trading Commission has led to an orderly transition into electronic trading of derivatives. Clients that have migrated more of their trading to Tradeweb's SEF have benefitted from custom workflow optimization tools like compression and the ease of trading market agreed coupon (MAC) swaps as outright trades or part of a roll, the firm said.

However, volume reports have shown that Bloomberg and Tradeweb are the two SEFs on the dealer-to-client-side that have captured the lion's share of volume from institutional clients.

While institutions are adopting SEFs, some are avoiding them by using nonstandard swaps, which they can legally trade off-SEF through voice brokers. Also, clients don't want to put large orders through the RFQ model; they fear this could lead to information leakage.

"We're seeing a larger array of investors leveraging technology to trade swaps, and this has clearly begun to reveal itself in the robust liquidity on our platform," said Olesky in an email response.

Tabb also says that D2D platforms are "currently enjoying double the flow that their D2C counterparts currently capture," but that the activity is existing flow, whereas the D2C volumes are steadily increasing each month.

Looking into why SEF volumes have fallen below expectations, Tabb's SEF Industry Barometer polled market participants, who unanimously said that trading had shifted to non-standard (off-SEF) tradable swaps. But Jenkins wrote that it's too early to draw conclusions, and that this is a "straightforward" case of summer doldrums. In early September, so far, the volumes for on-SEF and off-SEF activity support this thesis, he wrote. In the first two weeks of the month, daily notional traded on-SEF jumped more than 10%, while off-SEF activity remains consistently low.

Now that it's fall, and traders have returned to the desk and will deal with the expiration of package trades, Jenkins predicts that volumes for September and October should "match, if not exceed" their summer levels.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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