In a guest post for Fintech Focus, Daniel Marcus, Global Head of Strategy and Business Development at Tradition, highlights why naysayers predicting the decline of voice trading are failing to see the crucial role it plays in the new digital age of hybrid trading.
The argument that voice brokering has diminished and that the choice between voice trading and electronic trading is binary, and one must compete with the other in the modern trading ecosystem, is inaccurate. Whilst it is true that liquidity available on electronic trading platforms has continued to rise significantly over the past few years, the continued claim that voice brokerage is dying as a result is exaggerated.
If we consider the OTC derivatives market as an example, transactions are generally designed to hedge exposure and are therefore risk reducing. Accordingly, they often involve high-value (therefore notional amounts that are on average significantly larger than those traded on electronic venues) multi-leg transactions with varying degrees of liquidity and participation which require specific tailoring to meet the needs of individual participants. Using a purely electronic market to facilitate such trades would be challenging and potentially significantly increase the market impact for participants.
Tradition believes that in relevant non-commoditised OTC markets the choice is not a simple case of using one or the other, but rather, a hybrid model that combines voice and electronic liquidity/trading. This allows participants to benefit from the best of both worlds – taking the transparency, high quality market data and efficiency of electronic platforms and combining it with the customisability of voice arrangement through interaction with screen-based liquidity. By way of example the success of our OTC derivatives platform, Trad-X, and similar competitive platforms, particularly in the US, is testament to the fact that this model not only works, but also demonstrates, through their performance in terms of market share, the growing demand for flexible execution methods amongst market participants.
Another major advantage of hybrid markets is that the electronification of orders creates an audit trail. This allows for the capture of order and trade data that can then be utilised to address market issues. Take the example of the swap rate benchmark. This was previously based on indicative pricing, and was deemed vulnerable to manipulation. However, ICE Benchmark Administration now calculates the swap rate using irrefutable reference data based on actual firm bids/ offers and trades- something which was previously unheard of.
The fact is, voice broking and electronic trading complement each other well and necessarily so. There is no doubt that in non-commoditised OTC market products execution ecosystem, the fact that both have for the last few years, currently and will continue to exist symbiotically in most areas (Rates, Credit and FX Derivatives being prime examples) is the reason these markets have been able to function so well during the on-going development of global regulatory reform. Despite the potential negative implications on liquidity driven by huge change in market structure, brokers, in combination with our highly efficient and effective hybrid marketplaces have ensured liquidity continues to be of the highest quality available to our market participants.
It’s about time the industry as a whole realised the benefits of this perfect combination.