The announcement that new derivatives
exchange GMEX has received investment from SocGen reopened the
debate here as to the future of rates trading and who the
likely winners are going to be.
Reliable data is hard to come by on
exactly what is happening to over-the-counter volumes and where
they are going. Such evidence as does exist seems to show a
steady increase in Swap Execution Facility volumes, although
this is masked by several anomalies, including volume which is
still transacted manually but reported to look like electronic
Venues like Eris, which
offer swap futures, also report steadily rising volumes
Some things are
becoming clearer, however.
When a buy-side is
looking to hedge a particular period on a rate curve, it will
be able to select from a range of different but economically
similar instruments. At one end of the spectrum are regular
futures, which are cheapest and easy to understand, but lack
precision in terms of start and end dates.
At the other end will
be custom OTC contracts which, conversely, are the most
expensive but can be matched precisely to a
client’s exact requirement.
The question that
remains, then, is what happens in the middle? With its launch
of swap futures, the LSE is showing how it thinks it can offer
the optimum blend by allowing users to offset margin within its
existing pool of OTC open interest held at
But, to paraphrase
Spinal Tap’s Nigel Tufnel, Gmex aims to "go to
eleven" by offering the convenience of a future and yet the
precision of a swap. The challenge, of course, will be whether
compliance folks in the buy-side understand – let
alone approve – the concept. It may just be less
hassle for them to go to the regular futures market
Education of the
buy-side, therefore, will be a critical success factor for new
venues. This was the case in Europe, with the rise of the
multi-lateral facilities (MTFs) in the cash equities world.
Without natural liquidity, high frequency trading folks like
Virtu will be left twiddling their thumbs. The crucial lesson,
then, is that to be successful, any new venue needs a mixture
of participants in the same way that ecosystems in nature
support and require a mix of participants too.
By Steve Grob Fidessa Fragmentation