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As the trading of derivatives indexes goes electronic, players in the interdealer market believe that the next step may be to list the indexes on an exchange. |
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Many market participants believe that listing the indexes would lead to increased liquidity by enabling them to view all activity at once, a far cry from the current situation in which even indexes-not to mention individual credit default swaps-are often traded over the telephone, and information is culled in the same fashion. |
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"Indexes are ripe for listing," said Kevin Moynihan, a partner at Moytex Financial Software, a provider of software to the credit derivatives market. Moytex has been talking to several interdealer brokers, many of whom are now interested in following market leaders in adding electronic trading to their platform. "As more interdealer brokers add electronic functionality to their trading of credit indexes, their customers and the options exchanges are beginning to think that this market is ready for listing," he said. |
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Two of the leaders now being emulated are GFI Group and Creditex, both of which are extremely active in the marketplace for credit indexes. Creditex went live in March with its screen-based system, RealTime, and GFI Group recently launched its own system, CreditMatch, in mid-September (IDD, "GFI Launches U.S. Electronic Trading" 9/13). |
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Increased buy-side interest in the credit derivatives market, particularly with regard to indexes, has resulted in increased volume and liquidity. Cognizant of the need to keep up with this volume, and to cut costs as spreads tighten, brokers worldwide have logically sought to automate index trades. |
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GFI's system is a hybrid model, allowing brokers to trade over a computer screen or decide to work a trade over the phone, which has been the mainstay of the industry. As a young market, credit derivatives transactions are still conducted mostly by telephone. GFI is not planning to force brokers to use only electronic trading, and market participants say it would be unwise to take the human component completely out of the equation, as winning order flow is often a product of strong client relationships. The "electronic donut," as a trader in Tom Wolfe's "The Bonfire of the Vanities" called the telephone, still forms a more personal connection than a computer screen, many traders believe. |
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Nevertheless, clients do want the ability to view the market over "the screen" even if they plan to execute over the phone, which leads to the supposition that electronic trading will result in credit index listings. If all of a sudden, brokers have numerous screens from a variety of interdealer brokers all listing credit activity, the next step would be to combine those screens. Putting them together, so to speak, by listing all CDS indexes on one exchange could benefit the industry by increasing transparency, thereby bringing in more market participants, which would lead to increased liquidity. Or so the thinking goes. |
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"Everyone is interested in broadening the market for credit, and listing is one method for achieving that," said Ian Clague, a managing director at GFI Group. "If eventually there is a futures market in credit, I think we as an industry gain because the market is broader." |
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The next question, then, is which exchange would be a natural fit for the indexes. Several are contenders. One eager suitor is likely to be the Chicago Mercantile Exchange, which is even now considering a push to list the indexes, sources said. A spokeswoman for the exchange could not be reached by press time. Still, sources agreed that it's too early in the process to tell which exchanges will become players. |
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Several interdealer brokers have yet to add the technology necessary to roll out their own screens, and some are waiting to see what happens before committing capital to such a project. So, for now, interest among the exchanges will remain academic, though anyone could make a move. Said GFI's Clague: "It's who wants to prioritize this." |
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