Garban Intercapital, the largest swaps broker in the world, is looking to jump-start an electronic market in interest-rate swaps. The move would revolutionize the USD48.8 trillion over-the-counter interest-rate swaps market, which is currently dominated by voice brokers such as Garban.
Michael Daymond-King, director of electronic trading at Garban in London, said the brokerage plans to install screens showing prices in the OTC interest-rate swaps market on bank trading floors by year-end. He noted that U.S. Treasury bond trading has adapted well to the electronic market because price discovery has always been electronic but in the interest-rate swap market traders find out prices by picking up the phone. This, however, is a "small hillock in the way of e-transactions."
Peter Hartmann, director and swaps trader at Dresdner Kleinwort Wasserstein in Frankfurt, predicted electronic brokering of interest-rate swaps will peak at about 20% of the brokered market in three years. He added, "voicebrokers give you the story behind the trade," and chat rooms cannot compete with this. There are currently several interest-rate trading systems including Blackbird, which Hartmann uses, but they are in a vicious circle as these systems do not have the liquidity of the voice market and until they do traders will not use them. Hartmann said, however, that the electronic systems are convenient and good for transparency.
Garban talks to traders all day and has regular conversations with bank's management about how they want the market to develop, but Daymond-King said this is a largely Garban-led initiative. He added, "No one knew they wanted a Flake in their ice-cream until someone brought out the 99," referring to the hugely popular combination of a chocolate bar and ice-cream cone in the U.K.
Garban's screens and trading system will only be available to inter-bank traders, such as Morgan Stanley and Deutsche Bank, said Daymond-King. The screens will show prices for swaps in euros, dollars, yen and sterling. Officials at Morgan Stanley and Deutsche Bank did not return calls.
Garban Intercapital already has an interest-rate crossing system, called Swap Cross. But Daymond-King said that system executes trades according to theInternational Swaps and Derivatives Association's mid-market rate, whereas this will be a trading system that works in the same way as voicebroking.