In February this year, Deutsche Bank executed the first electronic CDS trades in full compliance with Dodd-Frank. In so doing, the USD582trillion (notional value) OTC market enjoyed its first taste of transparency. The trades were executed using Autobahn, an electronic liquidity and trade execution tool launched in 1996. Having evolved over the years, it offers clients a range of pre- and post-trade electronic services and has around 3,500 accounts actively trading on a daily basis. As well as banks and intermediaries, hedge funds and CTAs are a key user.
“We have hundreds of hedge funds using Autobahn and it’s a pretty broad set,” explains Serge Marston, Deutsche Bank’s global head of e-commerce. Marston says the biggest adopters of electronic services like Autobahn are those looking for low latency, such as high frequency traders, although he expects widespread adoption across the hedge fund community going forward. Regulations will necessitate it.
Autobahn is an important distribution for Deutsche Bank, given the electronic liquidity it provides. All major asset classes are supported. Approximately 7,000 fixed income securities are priced daily, with users able to analyse 15 interest rate swap curves to trade the likes of butterflies (non-parallel yield curve shifts). In FX, Autobahn supports 270 currency pairs, swaps etc.
“RV traders generally trade more electronically than say the macro guys. They trade liquid products and look to establish relationships between different asset classes. As such, these asset classes need to be liquid, readily accessible and easily measured,” explains Marston.
Given that Autobahn uses a menu-driven approach, there is some degree of cost elasticity. Fees tend to be based on a brokerage model for listed trades, but as Marston explains, “If they’re consuming both OTC and listed products it’ll be a combination of a brokerage model and spread-based fees.” It also depends on the size of the hedge fund.
Established heavyweights might focus on post-trade, whereas start-ups might consume pre- and post-trade services. This trend could become more obvious with start-ups under increasing pressure from investors to solidify their operational infrastructure. “The provision of e-services is going to become more important over the next few years,” comments Marston.
Marston stresses that Autobahn is mainly about execution. With the industry evolving, he sees three key drivers propelling the strategy going forward.
Firstly, client consumption behaviour is changing. There’s now greater emphasis on flow products. The reason for this, according to Marston, is because “it’s easier to manage risk, grab historical data and measure performance”.
Secondly, more of Deutsche Bank’s competitors have started investing heavily in technology and resources to become flow houses. They clearly see this as an area of future growth. Pre ’08, Marston said that only “three or four” competitors were offering IRS liquidity, “now there’s 15”. “Within the OTC derivative space there’s much greater competition. Everyone is focusing on becoming a flow house and the best way to advertise that they’re open for business is to advertise electronically,” says Marston.
Thirdly, regulatory changes are actually mandating the use of electronic venues to trade liquidity. Marston thinks this is an opportunity for high frequency traders to gain access to additional asset classes on execution platforms like Autobahn that “look, smell and feel like exchanges”. He thinks that within the next three years there could be active liquidity pools in 5-year CDS or 2-year, 5-year and 10-year IRS which might attract a lot of interest from hedge funds. Although he adds: “The rules still need to be played out.”
There’s a certain irony in the industry at present. Whilst the OTC market becomes more transparent, the growing demand for “dark pool” liquidity from block traders of equities is causing this asset class to shift in the opposite direction with low latency and anonymity key to protecting profit margins.
Given the enormous potential that the CDS market offers, however, it’s little wonder Deutsche Bank moved quickly to support CDS trade execution on Autobahn. They did the same thing with IRS trades in Q1 last year. “Users can log on to Autobahn, execute a trade and it’ll be automatically cleared. It’s that level of straight-through processing that engenders greater pre- and post-trade transparency that regulators are calling for,” explains Marston.
DB Clear, an application that supports clearing, was rolled out earlier this year along with Stealth 2.0, an equities-based algorithm. Another big development in the IRS space is Autobahn Prism. “This will allow users to develop trading relationships e.g. triangulation between an IRS, interest rate future and US treasuries,” concludes Marston.
The appetite for electronic consumption, it seems, is here to stay.
