THE AGGREGATE VIEW.

Dan White, founder of leading developer of advanced trading technologies for fixed-income markets, InterDealer spoke to Best Execution about the challenges brought about by regulatory changes and a tough operating environment.

What has been the main impact of a) regulation and b) the prevailing economic conditions?

What we are seeing now is that financial market participants are taking much of their direction from regulation and the need to de-leverage their balance sheets. This has seen a shift of the balance towards just a few firms which are still considered top-tier. Many sellside firms can no longer commit a significant amount of balance sheet to their credit operations, so they are facing increased pressure not to take on significant positions in their trading inventory.

Of the positions that they do take on, they are seeing increased scrutiny from the regulators. So there is greater pressure to offload from their trading positions quickly, within a few hours or a few days. Previously, banks had a greater appetite to take on positions and keep them for 30, or 60, or even 90 days.

This has impacted the market because we’ve seen a concentration of liquidity in large amounts among only a few players. For the sellside players who are able to respond to large amounts, these are the more lucrative trades for them. It allows them to be more selective about where they will respond to inquiries for customers.

The competitive prices in smaller amounts are broadening for a larger group of counterparties. Europe is more electronic trading focused and less dependent on the RFQ than the US, but we are seeing more availability of electronic prices in both regions. We also see more prices on exchanges. Aggregators are also maturing.

As a technology company, what do you see as the main challenges facing the industry?

What we see is a concentration in larger notional amounts only among two or three players, and then an increased number of smaller lots, where in order to get the best price, you have to aggregate from more and more sources. But the prices are out there, and become more relevant, although they are not available using a traditional RFQ trading protocol. It’s not necessarily true that the best price available in the market can be offered by the traditional dealers. From the point of view of a technology company, the challenge that the industry faces is about gaining access to prices from a broad number of counterparties. That puts pressure on connectivity. It is also about ensuring that the best execution protocols take into account all prices regardless of trading protocol.

How do your offerings address these challenges for a) the sellside and b) the buyside?

The key elements are to be able to bring greater connectivity to buyside participants, and to also take into account various trading protocols so you are able to get the best price. From a best execution standpoint, a traditional RFQ will solicit a handful of dealers to come back with the best prices available. However in practice the prices they are coming back with frequently are not as competitive as prices available on exchanges or from other open over- the-counter aggregators. So that RFQ price might not be the best price. The buyside firm needs to be able to obtain the best price in the market regardless of trading protocol, but also manage the workflow using automation.

What our system does for the buyside is that it allows users to access markets from any available RFQ channel and OTC aggregators and exchanges, and displays those prices in one platform, saving on screen real estate. In addition, we provide some algorithms that are designed to optimize trading, using the trading protocols that are accessible by the buyside. We basically give the user the ability to send out an RFQ, but we’ll also aggregate the prices that are available electronically, and we’ll allow the user to decide based upon what prices are available from all sources. We also allow the users to leave liquidity interest with their sellside firms thus enhancing their virtual balance sheet.

On the sellside, there is a situation with sellside firms, where the balance sheet has been compressed. These firms still have an enormous account base and franchise, as well as order flow coming from a diverse set of clients. Our system will allow the sellside firm to act as an agent in riskless principal format or enhanced riskless format, taking small positions through upsizing and simultaneously selling the position.

Could you define best execution in the credit markets and how do your offerings help achieve best execution?

For best execution, it is essential that the buyside is able to defend its position and the trade that it did by showing that it took into consideration all prices from all sources that were available, so if a better price is on an exchange than on an RFQ, for example, they can support their execution on the exchange.

How does the growth in the number of electronic trading platforms impact the problem of accessing liquidity?

The larger number of electronic trading platforms creates a greater need for simplified connectivity to all firms, and it’s very difficult for buyside firms or any firms for that matter to connect to all of the different sources out there. So it is helpful to have a single integration point with a firm that’s already connected to all of these platforms so they can access all this liquidity from a single protocol or a single screen.

In terms of the growth of electronic trading how do you see the market evolving over the next five years?

I think there will be a simplified work flow with respect to completing all the connectivity links to all the parties. There will also be this broadening scope of trading protocols, and I think that best execution protocols need to evolve so that buyside firms are taking into account all the prices available from all sources. This can only be done in a fully transparent electronic venue.