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  5. Innovation in Focus: New Trading Models in US OTC Fixed Income Derivatives

Innovation in Focus: New Trading Models in US OTC Fixed Income Derivatives

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27 November 2012
David Easthope

Let Them Have Order Books

Abstract

Electronic order books for the trading of US OTC fixed income derivatives are an innovative business design and have the potential to be disruptive. However, incumbents will not sit and watch market share slip away. We anticipate heavy competition when several new order books launch in 2013.

In Innovation in Focus: New Trading Models in US OTC Fixed Income Derivatives: Let Them Have Order Books, Celent describes innovative business models and technologies changing the way that fixed income OTC derivatives are being traded. We specifically focus on innovative order books for interest rate swaps (IRS) and credit default swaps (CDS).

In this Celent Securities & Investments Innovation in Focus Note, we augment our standard Capital Markets research reports by highlighting a key area within capital markets where technology innovation is leading to market disruption.

Although electronic order books (EOBs) by themselves are not innovative, when applied to highly manual, voice-operated dealer-to-client (D2C) swap markets, they have the power to alter them permanently. EOBs provide some strong and salient features to the swaps market, including enhanced transparency, wider access, and greater certainty of execution (at the point of trade). However, what they have in increased certainty (access, clearing, execution), they may lack (at least currently) in recognizable brand names. In the US D2C market, several public access order book designs are in progress to eventually become either swap execution facilities (SEFs) or designated contract markets (DCMs) for interest rate or credit default swaps, among other instruments, including Javelin, trueEX, and TeraExchange. Other near-order books are available from Tradeweb, MarketAxess and Bloomberg and will also likely become SEFs.

By being innovative, EOB sponsors could ultimately be disruptive. However, the scale of disruption that could take place requires a big leap of imagination because of stiff competition from incumbent players and because we cannot be sure of the ultimate liquidity of these instruments in a post Dodd-Frank environment.

“We believe electronic platforms, including order books, designed with features to capture existing workflow alongside new and innovative functionality will win in this scenario,” says David Easthope, Research Director with Celent’s Securities & Investments Group and author of the report.

This 19-page report contains four figures and three tables.

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