Mostly… fixed income and cross product eTrading

September 12, 2006

Liquidity Hub

Filed under: etrading — holky @ 2:36 pm

Watch out for Liquidity Hub (nee Hermit – good article here) – as this initiative has potential to fundamentally change the etrading market.

The change will not be instant (don’t expect the platforms to tear up existing dealer agreements), and the consortium itself may not survive as-is (with that many dealers around the table there is always the threat of differing agendas spoiling the deal), but this is the first major and coordinated challenge to the current model where dealers pay big dealer fees and also execution charges to send their liquidity to the etrading platforms.

While focus is on the dealer to customer IRS market, probably between 5-10% electronic at this point, the crosshairs are already and absolutely pointing at other product classes.

With spreads ever shrinking and a regulatory focus on transaction costs, dealers are rightly questioning all of the costs in executing in particular venues. The Liquidity Hub initiative will, just by having tough discussions with the existing platforms, help shape dealer/platform relationships going forward. Is there really any genuine reason a fixed income dealer should pay more in annual fees just to participate in a fixed income electronic venue as opposed to, say, an equity exchange? And why shouldn’t the dealer who is market-making get some of the value realised from their doing so? (check out etrading’s blog for an indication of why a market maker’s prices in an OTC market are of increasing value the further down the liquidity curve you go).

It seems fair to expect some strategic alliances/rationalization among the platforms, which I’d expect to be announced in the foreseeable future, that are triggered by/resulting from the dealer focus on costs.

What does this mean on the customer side? I don’t see room for the platforms to charge the buyside/customer for execution unless they are delivering a very specific (and quantified valuable) value-add. As I’ve said before customers aren’t using all of the functionality that’s available “free” now even though it would improve their transaction workflows, so I don’t see where charges would be accepted. The rumblings of Liquidity Hub do present a window of opportunity on the customer side though: why not ask your dealers if you can get a better price by executing the transaction in a particular channel/venue (yes, include voice in the comparison). Of course, when you’re already getting a choice price on the electronic platform then there really isn’t a lot of room for a price improvement, but it would make more sense to ask “can you improve?” and work out some form of strategic deal to build on for the future, rather than just to ask for an improvement on each individual trade you phone in to the salesperson. And the dealers really should all have an axe on this!



  1. My personal take on this is that Liquidity Hub, and to a lesser extent the Bloomberg Swaps Trader initiative, is an attempt by the banks to wrestle back the power from the well established ECNs and thus avoid being pushed too quickly (for their own liking) into trading certain products electronically before they are comfortable doing so (too high on the product life cycle curve). For example, Gilts back in 2004.

    I agree LH could be fantastic if it standardises and rationalises the FU e-trading market………again with the ifs. Can we be sure the individual banks in this consortium will stick to the agreed agenda? Will this open opportunities for banks not involved??? Will clients accept being told “this is where your liquidity comes from”?

    Comment by waratah — September 27, 2006 @ 3:55 pm

  2. Let’s take a step back. A few years ago, a group of dealers created a liquidity pool called TradeWeb. They raised the baby, sold it and made a lot of money.

    Now the same group of dealers (with a few additional) is building another pool of liquidity. The real question is: how do they plan to make money this time?

    Of course the story is attractive on the paper. One liquidity pool, rationalization, etc… But these arguments essentially depend on the transparency and availability of the hub.

    Who will have access to the hub? What are the conditions? Who will have to pay to maintain this hub? How much?

    Comment by smalner — September 30, 2006 @ 2:30 pm

  3. The interesting question is why this and why now? Dealers on the swap side have thrived through the lack of transparency and created major businesses around this approach. Why this? Why now?

    To help increase the transparency for the end client and make the market more efficient….umh umh umh? A tradition of Wall Street….No it is because a platform has effectively managed to get up and running despite the numerous attempts by the dealers to kill every possible attempt. If you can beat them… join them and create a new oligopoly of price distribution to control the business model. Maybe smart in the very short term but as history has proved many times this is not a long term move.

    Regulators are becoming very clever and understand better the ways and means of Wall Street. Brokertec, Tradeweb and others created a lot of interest in Washington leading to the sale of both entities to non broker based shareholders. Can LiquidityHub go unnoticed and control the market? Difficult to see that happening!

    For the markets themselves, well why not go for just competition and let the proved forces of market to establish the right balance of power between Buy side and Sell side? Why over engineer another generation of consortium that stifle competition and reduce the speed of innovation?

    Everybody loses when the end investor loses.

    Comment by freezmarkets — October 3, 2006 @ 8:17 pm

  4. Smalner, one major difference between now & when TW started, is that investors do wield more power, and thus the stronger ECN’s can channel this to “force” these poor souls at the banks to go electronic before they really wish to. ; )

    Comment by waratah — October 4, 2006 @ 11:41 am

  5. The same dealers who created TradeWeb 10 years ago dumpped it 4 years ago. Now they gather together again to create platform that simular, if is not the same.
    TW had two problem:
    1.Jim Toffy who was playing client side
    2.Lack of derivites.

    But I don’t see how they can introduce derivites without steady stream of analitical data aka Bloomberg.

    It will kill TW-Thomson aliance.

    Comment by SKV — March 26, 2007 @ 4:03 pm

  6. […] True Aim Of Bank Consortium? FT  today makes a point ive coveyed before (about liquidity hub being the first major and coordinated challenge to current model [in FI]).  The FT comment is […]

    Pingback by The True Aim Of Bank Consortium? « Mostly… — May 9, 2007 @ 1:33 pm

  7. Does anyone understand the mechanics of how 15 dealers streaming prices over bb or reuters execute trades?
    does winner take all, are they shared splits?
    do you need an isda with the hub? or each dealer?
    seems to me this was a direct reaction to TradeWeb
    but as thompson buys reuters, and the hub already provides
    pricing data to reuters, does this keep TradeWeb alive?

    Comment by oldtimer — May 11, 2007 @ 2:56 pm

  8. The mechanics remain the same. Will be basically the same as trading over a Bloomberg platform ISDA/ETORSA, paper side letters for the good ol Tradeweb 1999 way of doing things etc. Basically, the groups that do the onboarding have zero clout to challenge the platforms or their own legal departments to change any of that, and the banks themselves like to waste money on process and paper.

    As for the trading aspect, splitting a trades amount/volume would be cool, but its more likely to simply be a FIFO stack protocol. As for pricing data. Those interested are already aggregating IDB and futures data with TW data. The future will bring for fee data from individual banks. Watch for this in FX too and CDS/CDX too. Most savvy etraders are already asking why do I provide prices via Bloomberg for Bloomberg to resell. The currently developing generation of traders are already asking for a cut of the data income either via rebates on the liquidity provided or directly from pricing. This happened in Equities and will happen in other electronically traded assets/products.

    I have said IMHO before that LH is more of a stop gap measure by the older FI generation and investment bankers. Two purposes; First to capitalize on the hot market for ATS/ECN/Exchange companies (GS leading this drive to create a set of companies to eventually IPO/Sell, and how much better can it get, groups of followers to basically take most of the risk! It is practicaly “direct investment arbitrage’.) Second, to attempt to counter customers who are moving from OTC to DMA.

    Tradeweb lives no matter what, until there is something better.

    Comment by lacidar — May 12, 2007 @ 9:43 pm

  9. a continuous price stream, with a fifo stack, interesting
    a few more questions?

    assuming bb distributes liquidity hub pricing, this site, almost by definition should be the best market,,,, always.
    secondly, how wide will streamed markets be?

    seems a buyer and a seller could show up to produce a tight
    market.. and where do the dealers then source liquidity?
    idb’s have markets so wide you could drive a bus thru them…

    it seems this is another move where the dealers actually
    help the end users, unintentionally as it may be….

    honestly, how could 15 market makers believe that by streaming bids and offers constantly that it would preserve
    bid offer spreads?

    is this not the ultimate in transparency?

    Comment by oldtimer — May 15, 2007 @ 7:55 pm

  10. How is DMA different from ECN and OTC trading?

    The dealers recently injected another $150mm to create TradeWeb Fusion. The dealers don’t want their spreads to shrink/ disappear which the electronic markets do. Also as others pointed out, it is also about the market data and intelligence. Bloomberg & Reuters have made business out of packaging and redistribution of data from ECNs and Exchanges.

    Comment by Brian — October 11, 2007 @ 2:02 pm

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