Jeffrey Hogan : Technology and Voice: The Twin Pillars of Over-the-Counter Fixed-Income Trading-Dealing With Technology

This notion has been most evident in the over-the-counter (OTC) markets for the last 18 months, where the market has thrived on dynamically linked voice and electronic services contributing to a single global liquidity pool. At the peak of the global financial crisis, when many largely electronic markets in the fixed-income space were non-functional due to high-velocity price providers pulling or drastically curtailing their contributions, it was the voice markets that kept the markets open by operating as gatekeepers to liquidity and guardians of counterparty exposures. Now, the pendulum is swinging back to a higher percentage of trades executed electronically, as market volatility returns to more normal levels. Accordingly, the priority for OTC execution providers in 2010 will be to incorporate the vast flows and protection mechanisms inherent in the voice space into the electronic domain while ensuring that all post-trade processes are fully automated. The recent dramatic events have proven definitively that the OTC voice and electronic dominions should not function independently of each other.

These considerations enter a realm beyond high order strike rates, seamless straight-through processing (STP) mechanisms or any—much debated—migration to central clearing. Rather, the more fundamental ability of OTC fixed-income platforms in 2010 to compensate for gaps in sell-side coverage due to curtailed balance sheets and the resultant widening of bid–offer spreads, will be a defining factor in the health of the markets. Although the above factors are not as pervasive in the fully electronic on-the-run U.S. Treasury market, the capacity of OTC service providers to offer electronic execution, based on voice broker identification of viable dealing prices, will be one of the key determinants in the use of electronic trading in the OTC markets in 2010.

In a still-healing environment where fewer prices are being auto-posted, a system that attracts a wide number of market participants to submit volumes, priced at voice-broker designated levels, and which spark further post-auction activity, will become essential for volume generation. BGC Partners has globally deployed a counterparty-anonymous, auction-oriented platform of this kind, which we refer to as Volume Match. Currently operational in global single-name credit default swaps (CDSes), CDS indices, foreign exchange (FX) options and non-deliverable forwards (NDFs), Volume Match is expected to be delivered for European government bonds, and additional FX and commodities products in 2010.

With the reduction of tight "e-commerce" prices pumped out by the sell side, the role of the inter-dealer broker to creatively fill these gaps has expanded. Indeed, in the context of potential regulation directing OTC transactions to occur in an approved "exchange-like" environment where deals may be centrally cleared and reported to a repository accessible to global supervisory bodies, it is an obligation of the interdealer community to build electronic solutions that incorporate as many OTC products as possible within this format to ensure that market practices are consistent with regulatory design and purpose.

The U.S. Treasury market has other dynamics in play. As mentioned previously, absolute levels of speed are becoming less absolutely important. Instead, consistency of delivery and responsiveness is now the critical metric where capping the variance between mean and highest latency is the goal. Increasingly, customers are not assessing their average turnaround times—as current sub-10 millisecond speeds are "fast enough"—but rather how frequently spikes occur and what is the magnitude of those outlying orders. Therefore, the key technological challenge in 2010 in the U.S. Treasury market—given the progress on all other fronts—goes beyond increasing message capacity and optimizing co-location facilities for thousands of orders to the elimination of order drift to provide protection against the periodic single late order.
Overall, therefore, a global OTC operation should be based on the twin pillars of voice and electronic capability. By deploying scalable proprietary technologies stemming from a deep product set and a wide geographic reach, BGC is well-placed to assist the market in defining what actually constitutes an electronic transaction, and we are able to pave the way across multiple products and constituencies for the implementation of regulatory provisions. BGC's technology program for 2010 is based on making the markets safer in the eyes of customers and supervisory bodies while delivering low variance, multiple-order type execution systems to our clients worldwide, where the executable prices are either supplied or determined by our voice-broker franchise.

Jeffrey Hogan is managing director, head of business development, with interdealer broker BGC Partners

Back to press releases landing page