Swaps dealers plan to spend $504 million this year to develop swaps liquidity aggregation systems for buy-side clients, despite the fact that swaps liquidity is not particularly fragmented and such systems are not even needed yet as swaps execution facilities (SEFs) have yet to be implemented, according to the latest research by TABB.
Kevin McPartland, a TABB principal and author of Swaps Liquidity Aggregation: Best Execution to Product Selection, liquidity in the most liquid parts of the swaps market is going to fragment. Whether there will be three or as many as 10 SEFs per asset class remains unclear, but finding the size you need at the right price will become less about who you know and more about the quality of your aggregation technology, McPartland says.
McPartland appeared on GCTV last year to discuss the growth of emerging markets.
Swap trading desks are asking their budget committees for tens of millions of dollars to build technology to aggregate liquidity in a market that isnt actually fragmented yet, McPartland says. Its a tough sell, but it shouldnt be. By providing these new liquidity-seeking tools to their buy-side clients, dealers can fight to maintain the screen real estate and relationships theyve spent years obtaining.
TABB Group says vanilla interest rate swaps (IRS) and index credit default swaps (CDS) will see the widest adoption of the new aggregation solutions.
Yet creation of liquidity aggregators will be easier said than done, McPartland says. Aggregating request for quote and order-book markets into a single view is no easy feat. Automating the inherent complexity of an experienced swaps traders decision-making process requires technology akin to artificial intelligence. And we cant ignore regulatory uncertainty. Even if the final rules are passed early in 2012, industry lobbying and a change in the White House in 2013 could see the rules shift yet again. But the swaps market will fragment. The need for SEF aggregation is serious and its not going away.
(CG)