DirectMatch, Market Microstructure & SDPs

January 20, 2015

I’ve been heads down working on SpreadServe recently, so haven’t paid so much attention to the etrading topics that I used to blog about so much. Thanks to an update from mdavey, I’ve been catching up on the excellent, thought provoking content that jgreco has been posting on his plans for a new US Treasury trading venue, organised as a limit order book, with buy and sell side trading on an equal footing. I enjoyed the post on internalization and adverse selection. His points about single dealer platforms are well founded too, though my own experience in rates trading is that it’s difficult to get client flow on to SDPs as by their very nature they can’t offer multi dealer RFQs, which are critical for real money clients that must prove best execution for regulatory reasons. Of course, if the inter dealer prices from BrokerTec, eSpeed and EuroMTS were public in the same way as equity prices from major exchanges are public, then more solutions to the best execution problem would be possible. As jgreco rightly points out, transparency is key.

Now I want to raise a few questions prompted by jgreco’s posts, both pure tech, and market microstructure…

  • Java? Really? I wonder if it’s inspired by LMAX’s Java exchange implementation, their custom collections and Disruptor. I would have expected C++, but then I’m an old school C++er.
  • Is that really the workflow ? That must be a tier 2 or 3 bank. All my experience has been at tier 1 orgs where all pricing and RFQ handling is automated. If a trader quotes a price by voice, it’s a price made by the bank’s own pricing engines. Those engines will be coded in C++, driven by Eurex futures or UST on the runs, and showing ticking prices on the trader desktop. Mind you, obfuscation techniques were used to frustrate step 2: copy and paste quote. After you’ve spent a fortune building a rates etrading infrastructure, you don’t want everyone backing out your curve from your Bloomberg pages.
  • Will DirectMatch have decimal pricing, or are you going to perpetuate that antiquated 1/32nd stuff?
  • How will you handle settlement/credit risk? Will each trade result in two, with counterparties facing off with a clearing house?
  • How do you shift liquidity? When liquidity is concentrated at a single venue, it’s difficult to move. The only case I know of is German Govt Futures moving from Liffe to Eurex. I guess UST liquidity is fragmented across D2D and D2C venues, so it’s not concentrated all in one place, improving DirectMatch’s chances of capturing some of the flow.
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One Response to “DirectMatch, Market Microstructure & SDPs”

  1. Jim Says:

    Hi there,

    Jim from Direct Match here.

    > Java? Really?

    Java is slower then C++ but not that much slower that it’s worth optimizing for. All of NASDAQ is written in Java and that has sub-60 microsecond round trip latencies. I value the stability, ease of debugging when something goes wrong, and the ability to build things outside of the critical trading path quickly more then getting a few more microseconds.

    > Is that really the workflow ? That must be a tier 2 or 3 bank. All my experience has been at tier 1 orgs where all pricing and RFQ handling is automated.

    It’s really the workflow at just about everywhere outside the top 6-8 banks. The lack of value add is my main thesis on why rates desks are doing so terribly.

    > Will DirectMatch have decimal pricing, or are you going to perpetuate that antiquated 1/32nd stuff?

    I started in the equities world so I think the whole 32nd pricing is ridiculous. We should have more details on the precise tick size and how it hooks into legacy systems as soon as we finish up the conversations with the ISVs.

    > How will you handle settlement/credit risk? Will each trade result in two, with counterparties facing off with a clearing house?

    This is a critical point for all of our customers. We should have more details to share soon.

    Cheers!

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