Swap execution facilities will need volume to succeed, so the means of bringing in the trades is a critical aspect to a SEF’s business model.
Javelin Capital Markets, which was granted temporary SEF registration by the U.S. Commodity Futures Trading Commission last month, will rely on its network of dealers, an approach the company says is a differentiator in a crowded space
“Ultimately what wins this game isn’t going to be liquidity, liquidity, liquidity -- it’s going to be distribution, distribution, distribution,” said Javelin Chief Executive James Cawley. “There are a good 20 to 25 dealers out there, many of whom have been gracious enough to agree to give us liquidity.”
Founded in 2009, New York-based Javelin’s primary product focus is interest-rate swaps. In an Oct. 1 release, the company said it had begun executing swap trades, for clearing at both LCH and CME; customers can trade on a disclosed or anonymous basis, and may execute either through Javelin’s central limit order book or its Request For Quote system.
“We have a number of dealers signed up to stream prices to us,” Cawley told Markets Media in a Sept. 25 interview. “We offer a true limit-order book to the customer. It’s a crowded space, but we were one of the first out there -- we were working in Washington even before Dodd-Frank passed.”
Where some SEFs will generate trades primarily or exclusively through their own network and customer base, “we rely on the sales guys at our dealer firms,” Cawley said.
“How do you build a relationship with a firm? You might go to the guy who has a relationship, and pay him,” Cawley said. “But then I’m in competition with dealer customers who are my liquidity providers, and secondly, what happens if I hire the wrong guy?”
“Or, I can go to the sales guys and say, bring me the trade, I’ll pay you when you bring me the trade,” he continued. “That’s the sponsored access model -- whoever brings us the trade gets paid. We believe very fundamentally that in a commoditized marketplace, the relationship wins. We’ll bet on the human over a computer every time when it comes to sales relationships.”