Electronic RFQ repo markets and the social quest for liquidity
New regulations and a drive for efficiency are accelerating the move towards e-trading in repo markets, while advanced platforms and tools are reinventing how liquidity is sourced and accessed. And as multiple competitors vie for RFQs in the market, repo desks find themselves spoiled for choice. Just like choosing a social media platform, picking a venue and delivering on the promise of new sources of liquidity is more complicated than it might seem. A guest post from ION.
Most of us can remember the early days of social media. While you could stay in touch using phone calls, text messages and emails, new choices kept appearing: AOL, Six Degrees, MSN, Myspace, then Facebook, LinkedIn, and even Friendster. Then came Twitter, with its odd character limits. You asked your friends what they were doing. Some of them stuck with text messages (along with your parents, perhaps). But the more adventurous ones signed up to new platforms as each one came along. While you continued to make new friends in person and created strong relationships, you also tried these new social networks by linking up with your classmates and your professional contacts.
Although the idea of RFQ trading in repo has been around for a while, we are still in the early stages. The response from the market seems similar to the phase before the mass adoption of social networks: technology is there, but widespread usage is only starting to develop.
Tires have been kicked and traders are finding that the markets are for real. And, like you at the beginning of the social media boom, you think you already know who your real friends really are.
On the trading desk, relationships with partners will grow stronger, and new connections will be made along the way. But online, as D2C electronic repo takes hold, how will you make the right choices and not get left behind like the guy who still logs on to Myspace?
RFQ markets grow up
Electronic repo trading across both interdealer and dealer-to-customer markets is growing. The market is graduating from being mostly voice to genuine hybrid status. Collectively, electronic repo in both segments around the world comprises almost €1 trillion ($1.1tr) in average daily trading volume.
On the D2C side, much is changing. In Europe, Tradeweb has historically been the main venue but MTS and Eurex are investing in their existing workflows; BrokerTec has recently launched a dealer-to-client RFQ platform; and GLMX is pushing for European growth. Clearly, the market is continuing to expand and reinvent early offerings.
This shift towards electronic markets is driven by several forces. One driver is regulation aimed at creating transparency, which comes more naturally to electronic flows. Another is
the need to optimize resource usage and do more with less. Yet another way to see this is that automation is driving business change.
There are layers of complexity specific to repo, and a landscape where incumbent voice brokers are joined by brand new platforms. The high-level dynamics of these markets are not so different from what we see as users in the world of social media where being on the right platform is vital in order not to lose out on what is going on.
Making the right decisions
In electronic markets, data abounds. Traders can use this new access to information to make the best decisions available for their businesses, for instance comparing trading volumes and counterparty behaviour across weeks, months and quarters. Tracking this information can yield valuable insights into which platforms provide genuine advantages, and which are less useful compared to one another or to voice brokerage.
As markets become more electronic, having an aggregated view helps sort through the noise based on price, liquidity, past trading activity, among other metrics, and builds insight for predictive analytics that can answer: where is liquidity heading?
This becomes both a workflow challenge, and an opportunity, and what you do to overcome or seize what comes your way drives the design of the tools you need.
Social networks have changed how we interact with one another. Similarly, technology in repo trading can support or transform workflows. For example, extracting intelligence from raw data, understanding what matters from what doesn’t, binding together digital data (pricing and statistics), and supporting analytics with unstructured information, like email.
As always, technology gets noticed when it changes the perceived complexity of things, whether by making them simpler or harder. In this way, the “backbone” plays a key role: namely, the quality of electronic markets and the adapters that connect to them.
In the ramping up phase of the adoption of a new network, the more platforms that traders sign onto, the broader their options will be. This is the social network equivalent of creating accounts on every platform while waiting out which future winners and losers emerge.
Similarly, as liquidity becomes fragmented and transitions across old and new channels, traders should be prepared to migrate to different platforms as needed.
How ION can help you navigate
Traders, markets and vendors have seen the growth of new electronic trading networks before. For example, with UST bonds or SEFs for IRS and CDS. An initial proliferation of trading venues is followed by a consolidation of the ecosystem, until the next wave of innovation. Reapplying the lessons learned from these experiences with other products can help traders succeed in electronic repo as well.
At ION we’ve lived through multiple phases of platform adoption and consolidation, learning from the refinement in all the related information flows. We’ve used our experience to build up our offering of connectivity solutions for multiple asset classes and the trading tools to operate cross- market. We’ve learned to extract intelligence from the data we collect.
We believe that the electronic repo market looks similar in its growth trajectory. The shift from voice to hybrid to electronic trading will only accelerate. We provide one single GUI (graphical user interface) with one common workflow in a new generation of productivity tools, where you can plug-in the channels you need. Pick from SMS, emails, chats and multiple electronic markets. Data from all these sources will guide you in your quest for liquidity.
We predict that the new medium of electronic repo trading will grow like it did for social networks, leading to the redesign of how relationships are experienced. In repo trading, there will be more standardization, less friction, more fluidity and more data-driven decision-making. This is the social quest for liquidity, where technology will help you reinvent your best relationships and help you build new, digital-native ones.
As long as a strong data-driven compass helps you navigate towards the best options, you should arrive safely at your destination.
About the Author
Ed Tyndale-Biscoe, Product Owner, Secured Funding, ION Markets
Ed has overall product responsibility for ION Markets’ secured funding division. He has held several different roles since joining ION and has wide experience of development, delivery, business analysis and product management within the repo and securities lending area. He has been working in the industry since 2000, after graduating from the University of Sussex with a master’s degree in artificial intelligence.
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