Much of repo markets are still where they were 10 or 20 years ago: high touch and low spread. While dealers have recognized the problem for years, they are now being pushed by internal efficiency and balance sheet management teams to do something about it. Automation does not have to equal spread compression, a critical concern in the industry. A guest post from Tradeweb.
Electronic Request-for-Quote (RFQ) markets in repo are an important platform for dealers to efficiently execute commoditized transactions with clients. While some dealers remain concerned that electronic RFQ markets could put pressure on spreads, we find that the opposite is true: at Tradeweb, our platform is reducing time spent on manual, already commoditized business while freeing up resources for trades that deliver real value.
Electronic trading solves the complication of managing two-way communications with dozens of large clients at once. Leading firms are looking to automate the receipt and delivery of trade files on an automated basis. In an era of complex regulatory reporting, both dealers and clients need additional trade information that is most easily gathered from an electronic marketplace. This is where electronic markets have an advantage over even enhanced internal processing.
Tradeweb RFQ trading is supporting a natural evolution in global funding: the need for better data management is echoed across clients, dealers and technology vendors. Market participants get the data they need at the time of the trade to feed a variety of downstream systems and engage more actively in using data for their own business management. This matters not just to repo desks but to the entire firm, including Treasury, collateral optimization and compliance.
The current state: high touch, low spread
Electronic markets are well suited to managing commoditized trades in the US Treasury repo market in particular. An analysis of data from the Secured Overnight Financing Rate (SOFR) show that the US Treasury repo market was nearly $3 trillion in 2017. Of this, $734 billion is overnight GC volume that can be used to calculate SOFR, or 24% of the market (see Exhibit 1). An additional $1.58 trillion is bilateral business, the majority of which is commoditized. Together, these volumes suggest commoditized repo trading volumes of $2.3 trillion, or 78% of the market. This is the portion of the market where automation can deliver substantial benefits with low amounts of effort. Another $700 billion in daily volume likely requires active trader engagement, and this is where the traditional bilateral market works best for the dealer community.
The efficiency argument for RFQ is well told and remains true regardless. Trading electronically simply removes additional manual steps in the repo trade process. Firms are embracing electronic markets as part of their automated trading activities and Tradeweb has its own offering, AiEX, to support these efforts.
Addressing dealer concerns
For years, dealers have said that electronic markets would take away their business and that transparency would compress spreads. However, this is not what is happening in practice. The reality is that Tradeweb’s electronic market is managing nearly all commoditized trading activity where spread compression has already occurred. This is an efficiency play for transactions where the business and counterparties are known.
Electronic RFQ platforms support dealer to client business, a critical part of the repo market. They maintain the same dynamics as the relationship-based voice market while offering a traceable record of trading activity. The technology behind this audit trail, plus support for regulatory reporting and data management, delivers an efficient, networked Straight-through Processing environment.
As a practical example of this demand, we are told that post-trade integration with Tradeweb has moved from being a nice-to-have to a must-have. We have taken this to heart: for dealers, Tradeweb now offers a FIX API for pre-trade management including a third-party market viewer. Post-execution, trade data can be delivered by API, third-party gateways or an Excel flat file. These enhancements have been made in direct response to client requests.
Our trade data reflect this reality. From September 2016 to June 2018, Tradeweb’s average daily volume has seen steady growth. Between Q1 2017 and Q1 2018, trading volume increased by 112%.
Tradeweb also supports dealers where they need it most: in assessing the balance sheet impact of trading activity. Tradeweb helps dealers see the impact of trades pre-trade at the sub-account level. This provides immediate feedback on the profitability and impact of a trade, and is a substantial improvement over waiting for the trade to settle and receiving a phone call from a Treasury group that balance sheet limits are strained. In a market where balance sheet impact matters as much as, or potentially more than trade profitability, visibility on these figures is critical. In a competitive environment, it can mean the difference between a successful and unsuccessful dealer franchise.
Dealers must automate to succeed in their businesses, including efficient routing of inquiry flow, electronic trade confirmations and full STP. This is an internal mandate and is separate from the actions of an electronic marketplace. Tradeweb’s pre- and post-trade services complement existing automation efforts by providing real-time data access that connects seamlessly to internal systems. By automating business that is already commoditized, Tradeweb’s electronic RFQ platform saves valuable dealer time and effort to focus on bespoke transactions that offer differentiated spreads and improves client value.
Joanne Crisafi is a Managing Director focused on managing the Money Markets business at Tradeweb. Prior to joining Tradeweb in 2011, she served as a Managing Director on the Finance Desk at Citigroup.