Electronic trading of credit default swaps and black box trading are two areas shaping up as hot zones in the electronic trading space, according to officials at e-trading platforms. Tracking the development of both will be a continued focus on perfecting back office settlement and compliance.
Tom Eady, managing director of TradeWeb, said he sees electronic trading of CDS as the next big thing to hit the electronic trading market. "Credit derivatives and interest rate swaps are both multi-trillion dollar markets," Eady said. He also noted the larger amount of paperwork in derivatives trading as another enticement to automate the market. "The post-trade challenges of confirming IRS trades and CDS trades are more complicated."
Matt Claus, cto at eSpeed, said another developing area is the automation of black box trading. "With black box trading, clients are able to write their own custom application to interface with the system," Claus explained. "It provides the client with an unprecedented amount of flexibility. This technology has really started to take off in the last 12-18 months.
Claus said government bonds were the first securities for which clients were able to write their own applications and they are still the major asset class that is traded using the technology. He said as the technology moves into a more intermediate stage, with a higher number of adopters and more enhancements, clients will be able to write their own applications for trades involving other securities, such as corporates. Claus feels that soon there will be a wider range of other securities traded using the technology, but he did not specify a time frame.
Eady said a key driver in all the developments is improvement in the back office. "Dealers and customers both want to see an increase in the automation of the back office. It's available across the whole of fixed income and with it, the failed trade percentage is reduced to almost zero," he said. "You've got so many things that can go wrong when this is done manually. Transcription errors, the wrong settlement date entered, the wrong amount traded, someone hears a 'buy' instead of a 'sell'...this is a huge driver behind the investment in full trade cycle automation," he added.
Technology showing clients exactly what kind of price discovery they have received and an increased amount of scrutiny on dealers to get the best possible deal for the client is also heating up, Eady said. "The boardroom has definitely caught notice and they are beefing up their compliance," he noted. Eady believes that this issue will become a hot button topic sooner rather than later.