Voice trading: comfort between the screens
25 Jul 2011
While the sovereign debt crisis has perhaps come to the rescue of the credit default swap market in the past year, the CDS market, as a whole, has been critical to the success and profitability of wholesale cash and derivatives brokerage GFI.
While not one of the biggest brokers in the industry, GFI, which was founded in 1987, has carved out for itself an enviable niche in the CDS market. Fundamental to that has been its CreditMatch
online trading platform.
In the first quarter of this year, GFI’s fixed-income business recorded revenues of $71.5m. Of this, derivatives broking supplied $35m, or 49%, while the cash business supplied the remaining
These figures have been remarkably constant since the start of last year. The contribution to fixed income revenue supplied by CDS broking never drops below 47% of the total, and in the second
quarter of 2010 – when the sovereign debt crisis first reached fever pitch and there was consequently high liquidity in sovereign CDS – the derivatives business hit 54% ($32.8m) of the fixed income
total revenue of $60.8m.
In all, GFI probably handles between one third and one half of all European CDS trading and has an estimated 50% share of the iTraxx index volume. Icap, which is strong in fixed income and rates
broking, has a smaller share of the CDS market, though it is growing.
GFI’s chief rival in the broking of CDS has always been Creditex, which was founded just over 10 years ago with the explicit aim of providing an exclusively electronic solution to the broking of
CDS. GFI, in contrast, advocated from the first a so-called hybrid approach, which combined traditional voice broking with the ability to deal via an online platform. A decade later, this is still
seen as the preferred methodology.
Creditex went all-electronic much too soon, and even now dealers still prefer to be able to deal on the phone when the situation, or the instrument, demands.
This flexibility, and the identification of the CDS market as an area in which it wanted to excel, has made GFI the leading CDS broker.
Of course, CDS trading volume has dropped precipitously over the few years since the crisis, which also helps account for the decline in CDS broking revenues at Creditex, but GFI claims that the
diminishment of liquidity has helped it stand out from the crowd.
Although a hybrid model is now seen as the way to go, this is not to say that exclusively electronic real-time dealing is not increasingly important and will doubtless continue to be so. Around
50% of GFI’s single name volume is now dealt online through its CreditMatch platform, introduced in 2003 but which has been subject to numerous updates and improvements. Over 80% of iTraxx volume is
In the US, the amounts traded online are less impressive, as electronic dealing has had a slower and more reluctant uptake in New York. Nonetheless, about 50% of GFI’s CDX index volume is
transacted online, with about 25% of single name volume following that route.
Credit derivatives were the first instrument to be traded on this platform – an indication of the importance of the market to GFI – but other instruments, such as investment-grade and high-yield
bonds have been added.
It is perhaps interesting that the CDS market was one of the first to go electronic. At first glance, it seems less well-suited to this role than other derivative instruments. Its documentation,
for example, particularly in the early days of the market, was highly idiosyncratic and heterogeneous. The adoption of fixed coupons introduced greater homogeneity to the market, but this did not
occur until 2009.
Other instruments, such as interest rate swaps, would seem more suited to online dealing, but were slower off the mark.
Yet data released last week shows that electronic broking of swaps is now growing apace. Tradition, another interdealer broker, announced last week that since its launch on May 19 its dealing platform Trad-X has matched around 1,900 orders in euro-denominated interest rate swaps for a notional value of €112bn.
This is an impressive start. Eleven major dealers have signed to supply streaming prices, but not JP Morgan, Barclays or Deutsche Bank – shops that are generally reckoned among the biggest
Nonetheless, if Trad-X continues to hoover up volume as it has in the past two months, one assumes that it will not be long before these premier league players sign up as well.
It is noteworthy that Tradition has also chosen to adopt a hybrid voice and screen-based version for its trading platform. Ten or 11 years since the advent of screen-based trading of derivative products, this it seems is the sensible route. However, although dealers still like the comforting voice of a broker to provide market colour and discreet trading where low volume products are concerned, for an increasing array of instruments, a fully automated system is essential.