SingleDealerPlatforms.Org

It’s long been understood by banks, that in addition to significant membership costs and transaction fees incurred by banks when dealing with clients on Multi Dealer Platforms (MDPs), that the multi-bank nature of the platform, also reduces the bank’s value proposition to one of ‘simply’ competing on price alone.

Banks accept this, and in turn provide their greatest value added services (and possibly finest pricing) through their own relationship channel, the single dealer platforms (SDP).

Under the SEF rules, clients face the daunting prospect of 20-30 SEFs preparing for launch. How do they ensure they can access the ‘best’ SEF liquidity in such a scenario? Hence the notion of single dealer platforms fighting back against the SEFs, by becoming SEF aggregators.

However, when the tables are turned and SDPs look to become aggregators of SEF liquidity (for the benefit of their clients), it seems that the multi-dealer platforms start objecting to the very same value proposition that they used to attract clients to their platforms.

This comes out clearly in an article in today’s FX Week, which covers a number of comments from leading multi dealer platforms – extracts of which are here:

Taking Fixed Income first:

Tradeweb’s Bill Hult states that;

“One of the main reasons for forming Tradeweb was to pool dealer liquidity, and we’ve now been providing institutional investors with an electronic request-for-quote for more than a decade. With all the major swaps dealers already making markets to their clients on Tradeweb, it’s hard to see the benefit of Sef aggregation to end-users.”

Richard McVey, chief executive of MarketAxess, adds;

“We’ve been successful in aggregating a total of 80 dealer market-makers that are active on our system. Once you get to 80, there’s not much left to aggregate. We think of ourselves as a super-Sef already for credit,” he says.

Turning to FX:

FXAll’s CEO chief executive Phil Weisberg; “It would come down to the aggregation rules and whether we can be successful in that environment. We’d prefer not to be aggregated if the differentiating features of the platform were lost. But realistically, people are unlikely to buy the value proposition of aggregation until we know how many Sefs there are and that they’re viable.”

Am I wrong, or is the whole point that by aggregating SEF liquidity, clients will see the best prices. The MDPs should be applauding the idea of comparing competitive pricing from various SEFs, not resisting it – assuming the cost of aggregation is acceptable to the banks.

In addition, Phil raises a strange point which seems to imply that it’s not possible to be a SEF aggregator without becoming a SEF- Huh come again?

“Can you be a Sef of Sefs without being a Sef? If we’re a Sef and are trying to comply with the regulations, wouldn’t we need to regulate the aggregator too? You could see this as taking away the ability of the CFTC to approve the execution mechanism by creating a new one,”

Is that what we see in the futures markets – I don’t think so? If an SDP provides DMA access to an exchange, does that require the SDP to be regulated as well – of course not. What would however be required, is that orders designated or routed to the exchange comply with the exchanges order protocols.

At Caplin, our consistent view has been that under new SEF regulations, Single Dealer Platforms (SDPs) will continue to play a vital role as the ‘relationship’ channel of choice, through which banks provide clients with access to a whole suite of value added services such as pre-trade research, and post trade STP and now clearing, and of course liquidity, whether quoted by the bank’s own risk pricing engine, or by routing client interests through to exchange, or in the case of cleared products, by providing an aggregated view of ‘relevant’ available SEF liquidity.

This is certainly the view of major banks, like Deutsche bank and Credit Suisse, as stated here:

“We’re discussing internally how to be the aggregator. We’re trying to find a way to make it easy to execute across cash, futures and OTC markets as a way to separate ourselves from the Sefs,” says Rhom Ram, the London-based head of Autobahn, Deutsche Bank’s single-dealer platform.

“Sefs will appear and this will change what we offer to the client,” says Ian Green, head of e-commerce for fixed income, currencies and commodities at Credit Suisse. “In some markets, we’ll continue to use our risk management expertise to offer clients tight executable prices, while in other markets we’ll serve the client better with aggregation and routing expertise. If the question is how to get clients the best access to liquidity that’s fragmented in different places, we see that as an opportunity more than a problem.”

To be continued…

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