TF: It seems that as firms go through this process and as we look at the regulations – some are in comment period, some rules are written – it’s clear that, both in the U.S. and Europe – the demand for data – better data, more robust data – is going to increase based on these demands. And a big part of that is messaging, right?
MM: Right. Our position in the industry is that we provide reliable messaging to many of the most successful stock exchanges, derivative exchanges and high frequency traders so what we see is the data explosion in swaps is coming from a couple of factors. One is these new swap execution facilities are all going to generate new market data streams that have to be captured by people trading in this space.
Second, you’re going to have to report the trades you do to clearing houses – so that’s several new clearing connections that’ll have to be made for each market participant since most of the swaps market is still done over voice.
Third, the regulators – at least in the states for Dodd-Frank – say trades have to be reported to a central repository as quick as technically feasible, which means most likely at least you’ll have to report them intraday to the regulatory authorities.
TF: Are you getting different demands or requests from different people in the marketplace, whether dealers, SEFs or investors? Are there different people looking for different parts of that big information stack?
MM: There sure are. On the swap execution facilities – those infrastructures luckily look fairly similar to what exists in foreign exchange or equities HFT. We’re definitely seeing some of the new participants as swaps leverage our technology.
And of course you want be able to do analytics fairly quickly and easily and that means, in a lot of cases, tying these messaging buses or connections that you have to databases so you can track all those things and run analytics in near-real time based on the message traffic you're sending across the SEF because we do expect the equivalent of smart order routing that exists in forex and equities to eventually come over to the swaps market.
TF: You mentioned some of the technology being used in some other asset classes. And clearly there is a lot of technology in the marketplace but there’s a recent TABB Group report called Technology and Financial Reform: Data, Derivatives and Decision Making that indicates the current infrastructure is not sufficient to fully support swaps trading in this new era of electronic trading, central clearing and all that. What would you recommend – leverage existing technology, scrap legacy systems, build something new, buy off the shelf or some combination?
MM: What I expect is most people to do a combination of the two. They probably don’t need to completely rejigger their risk management so much but the data pipes they need are critical and the one thing, having gone through this electronification process, if you will, in equities in the ‘90s and foreign exchange in the late ‘90s, early 2000s,
The one thing I’d recommend is to come up with a common internal format for the five different asset classes. So if you’re going to be trading equity swaps, interest rate swaps, commodity swaps, etc…come up with up with standards internally. That’ll save you a lot of money down the road.
Also, look to what’s worked in the other areas and hit it hard and soon with a standard infrastructure because the more you wait, the bigger the market is going to be and the harder it’s going to be to catch up.
So I think you’re going to see people using legacy software in calculations in some places but having to deploy new, more modern electronic trading infrastructures. In a lot of places, that’s a greenfield.
The problem, of course, is the time. The time is compressed. We did this over several years in equities, maybe over a decade. The regulators are saying this all needs to be done in the course of 24 months. It’s going to be aggressive. In that TABB Group report you cited, the estimate was $3.4 billion spending in technology in this space over the next 24 months.
TF: Can you tell us about the competitive landscape out there and what should market participants look for in vendors?
MM: Look to people that have some knowledge of the space. You’re going to see a lot of general purpose technology companies coming to try to offer their wares. Look for people who have working knowledge of FPML, which is pretty much the defacto standard for exchanging XML representations of interest rate swaps and other swaps. That would be important.
I would say take a data-driven approach to it – in the end these systems are all about data. It will be electronic trading. The volumes are never going to be anything compared to what you see in equities volumes. I don’t expect there to be four million messages a second like in OPRA data.
The difficult part is that swaps trading requires you, in a lot of cases, to integrate exchange traded derivatives, futures trading and swaps trading – to do your hedges – into your smart order routing infrastructure, so there is going to be a place for low latency stuff.
I do think a lot of the sell side brokers are working on building out these systems for the buy-side participants, so if you’re a buy-side player, I think you could look to your big brokers and look to the single dealer portal solutions that are coming.
If you are a big broker, I think there’s going to be a lot of competition. That report cites that most people view technology as a competitive advantage in this space. It’s going to be important.