In the highly competitive world of fixed-income interdealer brokers (IDBs), two giants are vying for the electronic business of matching trades between large banks and brokers.
They are eSpeed - a subsidiary of Cantor Fitzgerald - and ICAP - which owns Garban. (ICAP acquired BrokerTec, an all-electronic IDB in May, and now has a hybrid voice and electronic-brokering model.)
But not every IDB is going electronic.
Tullett Liberty, a fixed-income IDB is staying with a hybrid model of voice brokering, arguing that it's more suited for the vast majority of fixed-income instruments.
"There are certain types of trades for which electronic execution is appropriate, and for other types of trades voice brokerage provides far better execution than is possible any other way," says Geoff Chapman, chief information officer at Tullett Liberty.
"There's all kinds of corporate bonds, off-the-run government bonds, government agencies and mortgage-backed bonds, where the liquidity is not there for the automated-trading level," says Chapman. Where there is frequently material advantage in voice brokering is when you want to deal in size, he adds.
However, Tullett Liberty shut down an electronic brokerage effort about two years ago when Instinet was also in the game, recalls Robert Iati, director of research for TowerGroup's securities and capital markets group. Even though the firm is still called Tullett Liberty, "The Liberty Brokerage part of it just effectively shut down," says Iati, who adds, "You don't hear much about Tullett Liberty. When you look at the IDBs, it's ICAP/BrokerTec and eSpeed."
But Tullett Liberty may be wise to stick with voice brokering, says Iati.
The combined market share of eSpeed and ICAP BrokerTec is probably 95 percent plus, he says. "There's not enough room left for someone like Tullett Liberty."
In fact, Tullett Liberty's model is not too different from ICAP's, says Iati. "Where eSpeed is exclusively electronic (in U.S. Treasury benchmark issues) and looking to push more electronic every day, ICAP has settled into this hybrid model."
Iati agrees with Chapman that the hybrid model will endure forever. "There is a level of success built into that," he says. "If you are an established IDB then you've already built relationships with your customers. To throw that away 100 percent to go electronic is foolish," he says.
Voice brokering has changed dramatically in the last five years, says Chapman. It used to be "a cottage industry," with traders using a dealer board and a few phone lines and doing everything manually. Today, he says, "The essence is still a human broker talking to a counterparty and using their expertise to put deals together, but they are surrounded by technology."
Like most IDBs, Tullett Liberty also provides price-discovery systems and pre-trade analytics, both internally to brokers and externally to clients on various kinds of screens.
On May 19, Tullett Liberty disclosed the launch of Post:marker, a straight-through-processing (STP) application that can be applied to all asset classes. After a trade is completed, it sends electronic-trade notifications to both counterparties. If the trade details are correct, clients can accept them and they flow into a firm's trade-capture and position-keeping systems.
But will the STP initiative make Tullett Liberty a more formidable competitor?
Though he has never seen the STP product, Iati predicts it won't change the marketplace or offer significant differences. "It will be nice to have for their clients, because all customers now are beginning to push for better STP. Look what TradeWeb is offering and Market Axess is offering," he says. "All these providers are being pushed to offer that. They're at the point where they have to do this just to maintain the status quo."
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