Tradeweb had to come from behind to reach its current status as the biggest dealer-to-client platform for interest rate swaps. For 2014 – the first year in which US firms were required to start using swap execution facilities (Sefs) – Bloomberg had $4.4 trillion of notional volume in interest rate derivatives, to Tradeweb’s $2.9 trillion, according to data from Clarus Financial Technology.
So far this year, Tradeweb has a decisive lead, having executed $11.4 trillion to the end of November, while Bloomberg has traded $8.8 trillion and trueEx $8.1 trillion.
It’s all going to plan, according to Lee Olesky, chief executive of Tradeweb: “It is always difficult to predict the exact impact of regulatory change and the timing of how much market share will move, but I think broadly our Sef is where we expected it to be from a volume and innovation standpoint after four years.”
Market participants attribute Tradeweb’s success – particularly in interest rate swaps – to the fact that many firms already use it for related products.
“Tradeweb is very well favoured with clients that already trade Treasuries and mortgage products – it’s an easy step to use the same interface for swaps. They have also been very good at adapting and putting in technology to allow new products to be traded,” says a New York-based swaps trader at one large bank.
The market share figures show what Tradeweb has achieved in swaps trading over the past four years, but they don’t tell the whole story. This year, for example, the platform has ramped up its compression activity – a key service enabling banks to keep a lid on capital consumption – while also launching electronic trading for swaptions and expanding its automated trading service to include swaps.
Not everyone is a fan, though, and the platform has at times been seen as part of the defensive bulwark that protected traditional dealers – 11 of which hold a minority stake in Tradeweb – from competition.
We have a responsibility to attract the top liquidity providers and run a well-organised market for our clients, adhering rigorously to rules on open accessLee Olesky, Tradeweb
Olesky denies the platform favours traditional swap dealers, insisting all liquidity providers are welcome as long as they meet its criteria.
“We have a responsibility to attract the top liquidity providers and run a well-organised market for our clients, adhering rigorously to rules on open access. This is ultimately about customer demand based on pricing and speed of execution, which has enabled new participants across fixed income and derivatives markets,” he says.
Like other Sefs, Tradeweb has benefited from the growing popularity of trade compression, which launched in November 2013. More than $14 trillion has been compressed on the platform since then, while $5.8 trillion was compressed in the first three quarters of 2017, up from $4.3 trillion for the whole of 2016.
Against the backdrop of increased trading and compression, Tradeweb has continued to develop the platform with the addition of swaptions trading this year to meet demand for expansion into volatility products. While there is no mandate to trade swaptions on a Sef, the intrinsic benefits of electronic trading in creating efficiencies and reducing manual errors should drive significant adoption, the platform is hoping. Alternative asset manager Garda Capital Partners executed the first electronic swaption on the Sef at the end of the third quarter.
Tradeweb has further expanded its product offering with the addition of single-name CDSs as well as automated trading for interest rate swaps and CDS indexes. Automated trading allows clients to pre-programme specific trading parameters without the need for manual intervention. The bulk of users currently tap the service for cash products, but a small handful are using it for derivatives.
“Automated execution is the next phase in the evolution of the market that began with request-for-quote and streaming prices. By pre-programming execution parameters, clients can reduce the friction and time they spend on trading. It allows us to take all of the data and content that is now available to bring greater efficiencies to the process of execution,” says Olesky.
With the recast Markets in Financial Instruments Directive now only weeks away, all eyes are on Europe and the impact of the transition to the new rulebook. Tradeweb raised eyebrows this year when it revealed details of a plan to allow instruments caught by the trading obligation to continue being executed bilaterally.
Olesky says liquidity in European swaps may be affected at the start of 2018 as market participants transition to Mifid II, but he sees an opportunity for technology to play a greater role in the market structure over the long term, just as it has done in the US.
“This has been a period of significant change for the derivatives market in an environment that has been challenging for liquidity providers in terms of profitability and volumes. But I do believe firms are starting to see the benefits of better price transparency and systemic risk management as a result of central clearing and electronic trading,” says Olesky.