High Frequency Trading Firms Eye Off-Exchange Opportunities
By Jacob Bunge Of DOW JONES NEWSWIRES
CHICAGO (Dow Jones)--Executives of high-speed proprietary trading shops are chomping at the bit to break into trading on over-the-counter derivatives markets and see regulatory overhaul as providing a long-awaited opening.
A push by regulators and lawmakers to shift trade in some financial derivatives into clearinghouses and electronic trading systems could loosen the tight grip that derivatives dealer banks maintain on the market, and allow high-frequency traders to make markets in products like interest-rate swaps and credit derivatives, according to executives.
"It seems likely that over the next one to three years that we will have access to these markets," said Liam Connell, chief executive of Allston Trading LLC, speaking at an event in Chicago.
Authorities in the U.S. and Europe are mulling a mandate for dealers and major buyers of swap products to put their trades through clearinghouses, which require participants to post collateral against transactions to reduce the risk of a default by any member. New rules could also see swap trade shifted to electronic platforms, seen as a way to bring more transparency to the pricing process of the products.
The U.S. House of Representatives passed a derivatives market overhaul bill in December, and the Senate this week is debating terms of its own bill. Current discussions target a 180-day implementation period for any new rules if a bill is signed into law.
Dealers have voluntarily adopted clearing for interbank transactions, but have resisted any move toward exchange trading of the products, which are a key profit center for the firms. Banks argue that such a move would raise costs and risks for the companies that use tailored financial derivatives to guard against risks in commodity, foreign exchange and interest rate markets.
On the other side of the issue stand proprietary trading firms, many of which utilize high-speed algorithms to make markets in stocks, futures, options and foreign exchange markets. The shops see a big chance for their firms to lower price spreads and make it cheaper for investors to participate in the comparatively opaque OTC markets.
"Opening up the market to more participants in the long run, as we've seen in the past, leads to tighter spreads and more certainty in the settlement process," said Mani Mahjouri, global head of foreign exchange for Sun Trading.
The $341 trillion interest-rate swap market, made up of instruments designed to hedge against moves in global funding rates, is seen as the most likely candidate for trading on exchanges or electronic platforms, said Richard Gorelick, chief executive of RGM Advisors. The more heavily traded products in the $25.1 trillion credit default swap market are another natural set of products to make the shift, he said.
-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com |
