Eugene Grygo, Chief Content Editor, FTF News
An interesting report on how investors still rely on sell-side advice and interactions even while swap trading is moving quickly to electronic platforms slipped past me, but it’s worthy of belated notice.
The report (issued late last month) from Greenwich Associates, “Interest-Rate Derivatives Sales: Not What It Used To Be, But No Less Important,” reveals that interest rate swaps are moving to “electronic platforms at breakneck speed, largely driven by the implementation of Dodd-Frank,” according to the market research and analysis firm. In fact, Greenwich is reporting that for 2015, better than half, or 60 percent, of notional client swap trading volume in the U.S. year is “being executed electronically — up from just 20% in 2014.”
The 60 percent benchmark is impressive given that five years ago “nearly 90% of notional trading volume was executed via the phone, instant messages and email, with only the remaining 10% directed to electronic platforms,” according to the study. “At that time, only 17% of U.S.-based investors traded any interest-rate swaps electronically, a number that has since jumped to almost two-thirds.”
The interesting thing underlying this bona fide march to electronic trading is that the buy side has not resorted to “no touch” trading.
“Our research shows unequivocally that investors are still looking to speak to an expert on the sell side about their trades, even if regulations tell them they ultimately need to trade on the screen,” says Kevin McPartland, head of market structure and technology research at Greenwich Associates, in a prepared statement.
“Despite this shift to electronic trading, investors continue to place a high value on the service provided by sell-side interest-rate derivatives (IRD) salespeople,” according to the Greenwich Associates analysts. “In fact, U.S. investors allocate one-third of their trading volume based on the quality of the sales coverage they receive, putting sales on nearly equal footing with execution quality, which on average drives 44% of volume allocation.”
The Great Recession helped underscore the human factor, the analysts found.
“Immediately following the financial crisis, investors started relying on sell-side salespeople for education about regulatory changes, new clearing rules, SEFs [swap execution facilities], and how to make the transition to electronic trading,” says Jasper Clark, Greenwich Associates associate consultant and author of the report, in a statement.
The human factor is also proving to be useful when a salesperson working in interest rate derivatives is helping investors with large transactions. “Block trades, which above a certain size are not required by regulation to be executed electronically on SEFs, represent a key area where sales can continue to add value and, in turn, influence allocation decisions,” according to the study.
For some reason, I’m finding it reassuring that the human factor of sell-side salespeople still matters.
It gives me hope that the robots will not take over completely.
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