GFI Group, which plans to file in the next few weeks to become a swap execution facility (SEF), has had the building blocks in place for some time, including trade matching, straight-through processing, and voice brokerage.
The company, which is the largest interdealer broker for credit derivatives, filed earlier this year to become a designated contract market DCM), or futures exchange, which together with the SEF, will enable users to execute swaps and indices through either the exchange or SEF models.
“This is a marketplace that needs to use technology in order to accommodate the CFTC’s core SEF principles, such as fair access, clearing, and settlement,” said James Toffey, head of eMarkets at GFI Group. “You need surveillance, real-time trade reporting, and post-trade processing.”
GFI applied for an exchange license because it wanted to be prepared to execute trades on either venue once the SEF rules were finalized. There’s a potential that some products may only be executed on an exchange, and some products may only be executed on an SEF.
“One advantage of operating a DCM is the ability to list futures contracts,” said Jerry Dobner, chief technology officer at GFI Group. “Futures contracts will be in demand in the post-Dodd-Frank world, because a DCM can trade swaps. We can list swaps on the futures exchange as needed.”
CreditMatch, GFI's electronic trading platform for fixed income derivatives and bonds, displays fixed income derivative and bond prices together on the same screen, giving users more information about what is moving these related markets and opening up more trading opportunities.
CreditMatch offers STP through a real-time API, improving trade processing efficiency and making trading capture faster and more cost effective. GFI's voice brokers assist CreditMatch users in executing large or bespoke orders - especially where anonymity and confidentiality are important - to avoid adverse market movements during execution.
As an SEF, GFI will be allowed to offer trading systems such as voice brokerage and request-for-quote, which are not permitted on a DCM, which can only offer central limit order book (CLOB) systems.
The SEF Rule provides that “Required Transactions” must be executed on a SEF in accordance with either a CLOB or an RFQ system. In providing either one of these execution methods, a SEF may use “any means of interstate commerce,” provided that the chosen execution method satisfies certain additional requirements that will be specified once the SEF Rule is published. For Permitted Transactions, a SEF may offer any method of execution, including voice-based systems.
Two products offered by GFI, Join the Trade (JTT) and Matching, illustrate how electronics can improve what was traditionally an all-voice marketplace.
JTT is a "workup functionality" that allows market participants to anonymously trade large volumes for a predefined period of time, at the prevailing market price without distorting the market. The setup encourages orders to be worked in the open market rather than being executed bilaterally.
Matching is a process run on various GFI electronic trading platforms which allows traders to anonymously contribute and trade at predefined levels on specific contracts during periodic session that are carried out during set times in the day and have short focused durations of approximately five to ten minutes.
By helping create concentrated and deep liquidity pools, Matching facilitates large volume trades at predefined levels. “Matching is an example of how an SEF operator can innovate to create more liquidity, because not everything is suitable for CLOB,” said Toffey.