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The Trading Mesh

Grease is the Word…

Wed, 14 May 2014 06:40:41 GMT           

By Peter Fredriksson, Baymarkets

In a previous blog post, I wrote about how the evolution of hybrid trading is bringing together the best aspects of voice broking and electronic trading in OTC markets such as commodities and fixed income.


One of the great things about hybrid trading platforms is the way they allow the key enablers of OTC markets - the brokers and dealers who ‘grease the wheels’ that keep the markets functioning - to continue to operate in ways that make sense to both buyers and sellers while bringing about greater efficiencies to the whole pre-trade and post-trade process.


For any introduction of new technology into an existing market, it is important for all involved to understand how that particular market works today. In the OTC world for example, I would argue that it is not possible to move directly from a voice-traded market to a fully transparent exchange market model in one go. Which is why hybrid trading platforms are so effective, because they help the markets operate more efficiently while mimicking the existing processes familiar to market participants.


A key element of OTC markets – and the main thing that differentiates them from exchange-traded markets – is that deals are structured and negotiated bilaterally. In this situation, the role played by brokers and dealers cannot be understated. They are the ones who negotiate the trade price and size and they get deals done. They are the grease in the machinery. So any move towards electronification and automation needs to recognise this fact and to make it easier, not harder, for them to perform these core functions.


One example of how this can be achieved on a hybrid trading platform is via selective multicast. Say a broker has an indication of interest to trade a large order, but does not necessarily want to show this to the whole market because there might only be a handful of premier or large volume clients who may want to trade on this interest. The selective multicast function of a hybrid trading platform allows the broker to display the indicative price and size selectively, for a specific time period, to specifically chosen clients only.


Other important functions for brokers and dealers are Requests For Quotes (RFQ’s) and electronic negotiations, both of which are also derived from voice trading.


These procedures reflect current practices and workflow in the OTC markets, but with greater price discovery and with the higher levels of efficiency brought about through more automation.


With the recent regulatory changes due to Dodd-Frank in the US and EMIR/MiFID2 in Europe, and with the push for greater transparency, more audit trails and electronic trade reporting, hybrid trading platforms are perfectly suited to comply with these requirements while keeping the wheels of the market greased.

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