RFQ an obstacle to new entrants, says FIA PTG chairman

“Historical relationships” will make it difficult for prop traders and others to make markets on Sefs, says the chairman of the Futures Industry Association’s principal traders group

Non-dealers that want to make markets on swap execution facilities (Sefs) will have to overcome the obstacle posed by request-for-quote (RFQ) trading that preserves "historical relationships" between large dealers and buy-side firms, according to Rob Creamer, president and chief executive of Geneva Trading and chairman of the Futures Industry Association's (FIA) principal traders group (PTG).

Since February 15, US market participants have been required to execute certain interest rate swaps on a Sef, which in theory allow all market participants to quote prices – opening the door to non-dealers – but the platforms are also compelled to offer two modes of trading. Central limit order books (Clobs) mimic fast-paced, exchange-style trading, in which the participant offering the best price at any one time will be at the top of a stack of competing prices – a model that is attractive to some members of the FIA PTG. RFQ trading, though, is a rough analogue of current swap trading practices, which allows clients to solicit quotes from a minimum of two selected dealers. This mode of trading is expected to be used by the vast majority of buy-side firms, especially when executing in large sizes, or blocks.

"I think there are issues with the way the RFQ rules came out," said Creamer, speaking at a Tabb Group conference in Chicago on May 6. "I understand the buy side's needs – and we have to understand what their needs are – but it makes it very difficult for principal trading firms to quote in the central limit order book adequately as market-makers when most of the activity that is occurring is between large, block players that have historical relationships. And when there is a venue side-by-side - which doesn't protect best bid and best offer and may not welcome other market-makers in the central limit order book to the party – it makes it, from the start, something that is not easy for us to get involved with in the near-term."

Creamer said the prospect of PTG firms entering interest rate swap markets on Sefs is "not going to be immediate", but he added that he hopes opportunities will emerge over time. Some dealers have been more open to changing trading practices than others, he said.

In February, Risk spoke with nine firms – including hedge funds and asset managers, high-frequency traders and proprietary trading shops – that have ambitions to compete against dealers in providing liquidity to the market. In addition, some big, sophisticated buy-side firms – including fixed-income giant, Pimco – are exploring the possibility of using Clobs rather than RFQ.

I understand the buy side's needs... but it makes it very difficult for principal trading firms to quote in the central limit order book adequately

"There are some players in the industry pushing things forward in a way that gives me hope and a little bit of optimism that things will trade in a dynamic way with transparency in the central limit order book," Creamer said. "There are a lot of things changing quickly on this. I have had meetings with people where I was pleasantly surprised at how far they have gone in breaking ranks with the establishment, realising that this method of trading will eventually become the norm."