Blackbird
435 Hudson Street, 5th Floor New York, NY 10014-3941
Contact: Carolyn Holt
Phone: 212-609-4733
Fax: 212-609-4701
E-mail: carolyn@blackbird.net
Web Site: www.Blackbird.net

One of the first interdealer systems to hit cyberspace, Blackbird is on the verge of critical mass in a wide range of over-the-counter products including dollar-, pound- and euro-denominated swaps and forward rate agreements.

The closely held company's equity investors include senior management, the Internet Capital Group and Reuters.

So far, 48 financial institutions have registered as trading members, including 20 in Europe. Another 25 European members are expected shortly.(See review)

eSpeed
One World Trade Center, New York, NY 10048
Contact: David Bauer
Phone:212-938-4821
Fax:212-938-4486
E-mail: dbauer@espeed.com
Web Site: www.espeed.com

Cantor Fitzgerald got a quick lead over the other interdealer brokers in March 1999 when it launched eSpeed, its electronic trading subsidiary. The system initially began trading benchmark Treasuries, agency securities and a few other asset classes. Since then, it's added 43 products.

ESpeed offers something the firm calls "electronically assisted trading.” The system was initially used as an internal electronic system to help brokers facilitate trading over the phone. "Then,” says eSpeed president Frederick Varacchi, "we took the input device, a keyboard, and gave that to our clients,” which include more than 500 registered broker-dealers and banks around the world. In some asset classes, the prices clients receive are generated by a rules-based matching system. In less liquid markets, the prices can be generated either by an eSpeed algorithm that prices complex trades or by individual brokers.

Although volume on the exchange is considerably higher than on its rivals (the firm did 824,000 trades in fourth quarter of 2000), it represents a relatively small fraction of Cantor's total volume, and liquidity in most markets is thinner than in the voice market.

Clients can trade a number of derivative contracts, including Treasury options, foreign exchange options and forwards, and U.S. and European interest rate swaps. Foreign exchange futures and forwards are promised soon. ESpeed also allows clients to trade futures on-line through Cantor Exchange, a CFTC-licensed futures exchange that's a joint venture between eSpeed and the New York Board of Trade.

Clients can use the firm's customizable front-end software to construct multilegged trades, cash vs. futures, and other types of complex transactions using their own algorithms, or they can link their existing trading systems to eSpeed through an API.Varacchi is particularly proud of the firm's credit system or "give-up matrix.” When a client does a deal with a certain counterparty, the firm enters the deal into a credit matrix based on credit limits set by the client institution. Unlike some of its competitors, credit managers can set credit limits by asset classes and change them on the fly.

ESpeed is also expanding into the commodity markets through Tradespark, a venture launched by eSpeed, Cantor and seven of the largest energy companies, which offers electronic trading in electricity, natural gas, coal and other products. ESpeed is also now offering a product called eSpeed Online that allows on-line retail brokers to offer wholesale prices with a small spread to their retail clients.

Garban-Intercapital ETC
Park House,16 Finsbury Circus, London EC2M 7UR,United Kingdom
Contact: Michael Daymond King, managing director
Phone: 44-207-623-5222
E-mail: daymond-king@icap-plc.com
Web Site: www.icap-plc.com

The world's largest inderdealer-broker last year announced the establishment of ETC, an electronic trading platform for a variety of capital market instruments. Although the majority of its efforts will be designed along a hybrid electronic model that includes voice brokers, the firm is set to release Swapcross.com, a purely electronic platform where participants will be able to trade swaps at a midmarket benchmark fixing. (See review)

GFInet
100 Wall Street, New York, NY 10005
Contact: Michel Everaert, director of marketing
Phone: 212-968-2917
Fax: 212-968-4124
E-mail: michel.everaert@GFInet.com
Web Site: www.GFInet.com

GFI offers automated trading in bond repurchase agreements, electricity products and several equity-derivative products. In the future, it will introduce currency options, credit default swaps and emerging-market bonds. (See review)

ICor Brokerage Inc.
500 Fifth Avenue, Suite 41, New York, NY 10110
Contact: Angelo Toglia, director of sales
Phone: 212-997-9736
Fax: 212-398-2045
E-mail: angelo.toglia@icorbroker.com
Web Site: www.icorbrokerage.com

Scheduled to go live during the first quarter, the ICor platform will first offer trading in foreign exchange options. Interest rate products such as swaps, forward rate agreements and swaptions, as well as equity index options will eventually follow. ICor believes that its competitive edge is to offer a variety of asset classes rather than restricting itself to a single instrument.

The interdealer-broker system will be accessed by dedicated line. So far, more than 40 institutions have signed up to use the trading platform. (See review)

iFox International Inc.
Sveavagen 145 6tr,SE 113 46, Stockholm, Sweden
Contact: Jack Parrish, CEO
E-mail: jack.parrish@ifoxdirect.com
Web Site: www.ifoxdirect.com

IFox, which hasn't launched yet, will stick to a "keep it simple” business model, offering a small range of vanilla interest rate products traded via a simple user interface offering as few bells and whistles as possible. With an intended target audience of broker-dealers in the highly liquid, commoditized interdealer swaps market, iFox will compete head-to-head with the likes of Blackbird, SwapsWire, ICor and TreasuryConnect.

The derivatives world is chock full of auction-based trading sites focusing on relatively exotic, one-off deals, says Jack Parrish, the company's chief executive and founder, without any major systems concentrating solely on high-volume, standardized products. IFox will initially offer standardized interest rate swaps in euro and sterling, as well as Scandinavian swaps and Norwegian, Swedish and Danish forward rate agreements.

Prebon Net
Prebon Yamane,101 Hudson Street, Jersey City, NJ 07302-3908
Contact: Mohammad Kousha, vice president of marketing
Phone: 201-557-5235
Fax: 201-557-5904
E-mail: mkousha@prebon.com
Web Site: www.Prebon.net

Prebon Net, like many automated electronic derivatives systems, stops short of full on-line execution. Instead, it relies on the old voice-over-telephone convention to conclude transactions.

The system, accessed through the Internet or via a dedicated line, transmits trade information about foreign exchange forwards, money market products, swaps, equity derivatives, gas and various emerging-markets products. Prebon says it has signed up more than 500 customers thus far. (See review)

StructuredMarkets.com
1501 Broadway, Suite 1900, New York, NY 10036
Contact: Dean Curnutt, president
Phone: 212-704-9923
Fax: 212-704-9913
E-mail: info@structuredmarkets.com
Web Site: www.structuredmarkets.com

StructuredMarkets.com is an on-line dealer-to-client platform that enhances the structuring process for standard over-the-counter equity derivatives such as volatility and variance swaps, options, swaps and collars. The system automates the key areas of the structuring process that, traditionally, have been done manually and thus inefficiently. The result: a more commoditized deal-structuring process.

The platform is built around three components: the distribution of product information, standardization in the pricing process and a more efficient documentation process. To distribute information, the system offers customizable Yellow Pages of equity derivatives end-users and, eventually, will provide a list of buy-side clients. It also offers a request-for-pricing engine to streamline inquiries and the delivery of pricing. And the documentation process is made easier by automating back-office functions such as confirm-generation, and enables clients to exchange documents and data on-line in a secure fashion.

The system went live last summer in the United States, and will expand to Europe and Japan in the future. Dealers pay a transaction-based fee based on the product type and the notional value of the contract negotiated on the system, while end-users are charged a subscription fee.

SwapsWire
One Liverpool Street, London EC2M 7QD,United Kingdom
Contact: Andrew Brown, CEO
Phone: 44-207-956-2750
E-mail: Andrew.Brown@swapswire.com
Web Site: www.swapswire.com

SwapsWire is scheduled to go live this spring, focused on interest rate swaps and swaptions in the interdealer market. Formed by 23 global banks—the backbone of the global swaps industry—the point-to-point system will be accessed through a dedicated line. (See review)

TradeKap
Kappa Financial Services, 72 Canon St., London EC42 6AE,United Kingdom
Contact: Simon Roberts, managing director
Phone: 44-20-7667-6910
E-mail: simon-roberts@kappa-fs.com
Web Site: www.tradekap.com

Targeting the European equity derivativesmarket,TradeKap.com is an electronic brokerage system operated by London-based Kappa Financial, a voice broker specializing in German and U.K. equity derivatives.

The system offers over-the-counter contracts and exchange-look-alikes—such as options on the Dax, Stoxx and FTSE indices—that mimic existing listed contracts but may include a larger notional value, broken dates or combination trades such as covered calls.

Treasury Connect
650 Fifth Avenue, New York, NY 10019
Contact: Ellis Simon, vice president of corporate communications
Phone: 212-373-4227
Fax: 212-830-4567
E-mail: simon@treasurydirect.com
Web Site: www.treasuryconnect.com

TreasuryConnect offers real-time, Internet-accessible over-the-counter derivatives trading to corporate end-users. So far, interest rate and currency swaps, collars, and caps are offered on the site, with additional asset classes planned later. Since its launch in May 2000, roughly $1 billion in notional value has been traded by 50 registered accounts. Equity investors in this privately held company include Enron, AIG, Williams Capital, and E-ventures international. (See review)

Blackbird Programmers Galore With Big Plans

So you want to set a new technology standard in derivatives dealing? Something as good and fast as a stealth bomber? What's the first step? In the case of derivatives dealing platform Blackbird, you get some financing from Reuters and Internet Capital Group, and you build a development team in Charlotte, North Carolina, 60 strong. Then you promise Street clients that you'll cut their brokerage costs in half and give them multiple ways to transact. Then you open up offices in New York, London, and Singapore to house trade facilitators and salespeople, and you make sure that your system addresses credit monitoring as well as the upload and download of positions. That's been the 16-month history of Blackbird. The firm promises to handle multiple derivatives products when it is finally finished, but has chosen to try conquering the swap market space first. One of its rivals, ICor Brokerage, meanwhile, has chosen currency option trading as its initial target. The differences and similarities between these two companies are marked. One core difference is that Blackbird has invested heavily in its own development team, whereas ICor has mostly been outsourcing its source code work. But the results of the programming are amazingly similar. The two systems use identical color coding of bids and offers with respect to credit. After bank officers feed a credit file across to Blackbird, bids and offers that are an acceptable credit for both sides of a potential deal show up in green, bids and offers that are not are red-colored, and yellow-color prices indicate that one side will likely need to check for credit availability. There is also a great deal of flexibility on how bids and offers are presented. If something is italicized on Blackbird, it means "I'm likely bidding here, but you have to check back with me first”—a nice safety feature similar in functionality to one ICor offers for the busy dealer. The similarities are so striking that the companies might be better off joining forces. They would make a powerful combination, and potentially save a lot of redundant work. Dorsch expects all markets to eventually trade on a single platform, and swap trades to gel automatically with spread trades in the equity market or in the currency world. What Blackbird's current platform basically does is to simplify complicated swap agreement terms into one line of numbers—a process it refers to as "decrementing.” This information can then be easily passed around and understood by multiple systems, before being exploded back up into a full term sheet. Unlike SwapsWire's point-to-point bank consortium effort, Blackbird starts with a centralized screen that shows the best melded rate of all the best bids and offers outstanding. Click on a given swap structure and the underlying depth of the market appears. Deal on a price, and a proposed deal template appears along with a chat functionality to hammer out the final terms. There is also a functionality for either side of a transaction to propose doing more size on a given price. Compared with ICor, the only thing missing is a nice graphical interface to highlight where business has been getting done and which current bid-offered prices are potentially out of line vis-a-vis a central curve. Blackbird does not share its volume statistics with the public, but the transparency and ease of dealing on the system seem first-rate. The company also hopes to supplement this centralized screen dealing approach with Blackbird-direct, where dealers can call each other on a point-to-point basis, as well as Blackbird-on-demand where a participant on the platform can begin a reverse auction. Both of these platforms have recently been released. The management of Blackbird is not lacking in vision. Founder and COO Shawn Dorsch sees the day when all markets will be trading on a single platform and trades in the swap market can gel automatically with a spread trade in the equity market or in the currency world. The attitude at Blackbird is to jump in with both feet, and spend whatever money it takes to prepare for this new world. The company has certainly done a good job building a state-of-the-art swaps trading platform that should be open and expandable to other products. But after 16 months, Blackbird hasn't yet reached the point where it has released its swaptions or caps and floors dealing modules. The company better hurry in its product rollout. After all, with a staff of 90 to feed, one can't help but wonder what the cash burn statistics look like. —Barclay T. Leib

Garban Icap's Crossing Engine

A number of players are racing to offer live interdealer swaps broking, and Garban Intercapital, the world's biggest interdealer-broker, is no exception. There's some debate, however, on how long it will take before a truly liquid electronic swaps brokerage system catches on. Until then, Garban is starting what it hopes will be a more modest but more immediately successful initiative. The firm is about to release Swap-cross.com, an electronic crossing network for swaps that will enable participants to trade their interest at a pre-agreed midmarket benchmark. The big advantage: clients will be able to trade at a fair price without the fear of their orders impacting the market price. Initially, only euro swaps will be offered, but the firm intends to expand into the U.S., Great Britain pound and Swiss franc swaps market later this year. Although crossing systems don't exist in the swaps market, they've been launched successfully in the equity and bond futures markets. Other crossing systems typically take random snapshots of electronic prices during the day to set a midmarket price. "We can't do that because swaps have no underlying electronic market, so we've taken ISDA fix, the only swap benchmark fixing rate, which is compiled by ISDA, Reuters and Garban Icap,” says Kieron Nolan, director of product development at ETC, Garban's electronic brokerage subsidiary. Swaps-cross will offer two postings a day: 11 A.M. and 12 noon Frankfurt time. The system will limit orders at 10:59 A.M., run the matching algorithm at 11:00 A.M., and publish initial results a minute later. Counterparties will know how much they've traded with which counterparty, but they won't get the final midmarket price until the ISDA fixing is announced 20 or 30 minutes later. "That allows counterparties time to put on their hedges,” says Nolan. "Their orders are only committed for a couple minutes. If they're not matched, they can go elsewhere.” After the fixing is announced, order details are fed directly into Icap's back office, which generates standard G-Icap confirmations. The firm is about to release Swap-cross.com, an electronic crossing network for swaps that will enable participants to trade their interest at a pre-agreed midmarket benchmark. Garban hopes interest will come from three groups. Large proprietary traders who fear giving away their positions might find it a good way to prevent the market from moving against them. Relatively small players who traditionally pay high bid/offer spreads may jump at the chance to get a midmarket rate. The firm is also targeting swap option players. "Quite often swaption traders inherit swaps on swaption expirations they have no use for,” says Nolan. "This allows them to trade out at midmarket.” Nolan stresses that the system is completely anonymous and confidential and is run separately from Garban's voice operation. Although individual brokers will get sales credits for their customers who use the system, they will not have access to any details of order flow. Users will be able to see only their own orders and the total number of orders per maturity. They will not be able to see volume numbers or buy/sell information, thereby eliminating the market impact of orders placed on the system. "The technological requirement is a lot less because it doesn't require a constant live two-way flow of information,” explains Nolan. "We're not coming out with clever technology. We're using standard technology and applying our business expertise. It's a much easier technological nut to crack.”

GFInet A Voice-Assisted Platform With Long-Term Buy-Side Aspirations

GFI Inc. was one of the first traditional voice brokers to recognize the importance of electronic trading to the future of derivatives trading, and the company has spent much time and money over the past two years developing its subsidiary GFInet's web site. Many of chairman Michael Gooch's recent statements about his firm's e-commerce strategy contain an implicit threat to his interbank clients: If banks are going to invade his traditional intermediation space with a slew of new multidealer electronic consortiums, he promises to allow derivatives end-users to come directly to GFInet to help form a central derivatives portal for the world. Despite this, in the past year Gooch's buy-side aspirations seem to have been on the back burner as the firm's web-development efforts have focused on first conquering the home interbank turf. In early 2000, for example, the firm's first cut at a functional derivatives web site revolved around a currency pricing calculator and clunky-looking volatility analytic tools that might have impressed a corporate treasurer who lacked his own options pricing software. But since then, GFI has purchased currency option software vendor Fenics Ltd., and has developed a new currency options dealing platform that's clearly geared to the interbank market. GFI's soon-to-be-released offering will run on a virtual private network with Java applet downloads. It will allow dealers to electronically trade at-the-money forward option straddles, 25-delta risk reversals and vega-neutral butterfly spreads across a standard maturity curve. Non-standard interests will also exist on the system, although for the moment these will be input and maintained by voice brokers. The system has a clean montage of volatility bid-offered prices, including small denotations for special premium terms and expiry cut-off times. Users can enter an entire run of volatility prices and toggle these higher or lower with ease. Users will also be able to view the depth of the market and pay up through multiple offers, or down through multiple bids. The system includes many user-friendly buttons and single-letter keystrokes to defensively cancel orders—either one by one, across a currency pair, across an individual user or across an entire market-making entity. Actual premium prices are generated on the basis of a live price feed, with voice brokers still mediating any detail disputes. An interdealer chat functionality is promised for the future. GFI has demonstrated its currency option dealing platform to more than 60 banks and hopes to implement the product in three stages: first as a simple information screen for orders received by voice brokers, then for actual interactive trading, and eventually with a straight-through-processing capability. GFI says it is already working with five banks on the STP part of that equation, but it still seems far away from such a functionality. The system, for example, does not try to conquer the complicated issue of credit usage monitoring. A dealer simply rejects a deal if credit is not available, but this obviously forces counterparts to prematurely reveal themselves to each other—a less than optimal solution. GFI trades over 34 different markets and, with time, hopes to provide each of these with its own on-line electronic presence. For the moment, in addition to its plans for currency options, the firm also has a functional European repo dealing site with 26 clients and 55 discrete users. A few issue-specific deals for large size have recently traded here, and GFI claims the system has already led to a sharp increase in its total repo volume. This latter system has a nice layout, complete with a security-specific personal window, and the ability for a dealer to easily take notice of all new dealing interests that may be posted across any number of user-defined markets. A U.S.-based repo system similar in design is being brought on-line shortly, with eSpeed likely to be GFI's biggest competition in this space. GFInet has clearly made strides forward in the past year. But by design, the firm intends to maintain a hybrid voice-assisted electronic platform for a long while. As such, complete STP solutions may be hard to implement. In addition, ignoring credit issues for too long could cost GFI some market share, particularly if ICor's or Blackbird's more sophisticated dealing platforms become popular. But GFI is certainly positioned on the high ground since it has a preexisting client base. If the firm can maintain its focus and innovative efforts, Gooch's grander portal dreams could still someday come to pass. —B.L.

ICor Brokerage Targeting Currency Options and Swaps With Sophisticated

ICor Brokerage is a multiproduct interbank derivatives platform that has been in development for over a year, and has yet to be rolled out. The firm is planning to tackle the currency options market in the second quarter of this year, before moving on to interest rate derivatives and eventually equity derivatives trading. The ambitious system has been built to replicate a variety of traditional broker functions. One of its niftiest features will be its ability to highlight trades close to meeting a bank's interest but not exactly the original proposed bid or offer. The system will check credit availability for a deal, and highlight in advance bids and offers that are potentially dealable for an institution. It will also allow structured haggling between two banks over actual trade details once a volatility price has been agreed on. Users, moreover, will be able to see graphical screens that map the maturity and delta buckets where market activity has been taking place on a given day. A variety of the dealing windows are personally configurable so that one can filter bid-offered prices in numerous formats. At the back end of the system, deals are captured in an XML wrapper for potential download to bank risk management and back-office systems. The firm has already lined up an impressive list of 47 banks to participate in the platform. The primary lure is that banks showing support prices will initially deal free of brokerage charges, while price takers will pay approximately 30 to 50 percent less than what traditional voice brokers charge today—a substantial savings. ICor clearly has the pedigree of personnel in Jeff Larsen, formerly head of international capital markets at Chase, and Neil Chriss, formerly a portfolio manager at Goldman Sachs Asset Management and the author of a quantitative book on options pricing, to know what it's doing. The staff at ICor has also been carefully pieced together to include a variety of derivatives market professionals from different market sectors. As a result, much care has been taken to make the look and feel of the system user-friendly—and in most ways it succeeds. The visualization of market activity on a screen is certainly unique: every time a trade transpires, color-coated dots appear on a graph representing each trade. No longer will a trader have to ask his broker that classic question, "What's been going on?” The trader will actually be able to see the trades appear as they take place. This is a nice feature for a trader who has had to step off the trading desk for a period of time. Management is clearly less concerned about being first in the e-derivatives space than it is with getting its product's overall functionality right. The firm's attempt to handle credit availability via red, green and yellow color coding to bids and offers (driven by a credit file that each bank's credit officer will update as often as the bank deems necessary) is also a well-thought-out approach to a classic stumbling block for systems of this nature. Of course, a real-time credit file being dynamically pushed across to ICor from dealing banks would be an even better solution to the credit check process, but for the moment banks seem generally unwilling to part with such real-time cross-product information, so ICor's path is the next best choice. There are other bells and whistles built into ICor, including the ability to show the depth of a given volatility bid-offered market, and to work "active but confirm” orders—something ICor refers to as its ABC functionality. A dealer placing an ABC order gets one last chance to review a proposed deal and accept or reject it, or to propose minor modifications to the price, before the deal automatically trades. The intention is to replicate the traditional broker function of checking back with a client before dealing on a price that might have turned stale with time. In addition, when a dealer wants to send out a specific price request for large size, that dealer can do so using ICor's "RFP technology,” which the firm says it has patented. The system has considerable flexibility, but it is not all-encompassing. Simple delta-neutral risk reversals and straddles are allowed in the system, although slightly messier structures like a 30-delta put vs. a 10-delta call are not. In addition, a dealer can only trade vanilla options in terms of volatility and with a delta hedge, as opposed to the occasional interest in the real world where a bank may want to trade an option live without a hedge and in terms of a hard dollar percentage premium. In exotic options, the system can trade simple barrier options such as knockouts, knock-ins, reverse knockouts and reverse knock-ins, and does so using correct market conventions. But digital options such as one-touch options or double no-touch options are not currently supported. Overall, compared to many e-derivatives trading efforts, ICor has made great strides. Management is clearly less concerned about being first in the e-derivatives space than it is with getting its product's overall functionality right. That said, the system still does at least one thing a bit backward. If a dealer wants to examine an option or option strategy's cogent details such as delta, gamma, theta and actual dollar premium before posting a volatility interest, the dealer currently must do so outside the ICor system using Fenics or some other pricing model. Within ICor there is no direct flow from a price examination process to posting a bid or offer. Instead, one can only examine thumbnail details (approximate price, delta and gamma—vega and theta are missing) of volatility bids and offers already posted on the system. This seems less than optimal in design. Lastly, given the amount of trade information being captured by ICor, and its neat graphical representation of activity in different deltas and maturities, it would seem a logical step for the system to offer further analytics. For example, capturing implied volatility levels that have traded over a series of days or weeks and comparing them with a historical calculated volatility would seem easy for ICor to do, but it isn't a functionality in the system for now. It might also give the firm a further level of service far above that offered by its traditional voice competitors. Much work on other products also remains, since ICor is supposed to be a multiproduct platform. When ICor gets its currency options module up-and-running on a live basis, it is still going to have to do a significant re-gearing of the system to handle interest rate and equity derivatives where different market conventions, pricing models and field entries exist. Can ICor management get all this done before its venture-capital money runs out? A new round of private financing for ICor is on the way for now, but a strategic partnership with an existing broker looking for a better e-commerce foothold might help. ICor and a firm like Tradition Financial Services, for example, could make a powerful combination. —B.L.

Prebon.net Kissing Good-bye to Green Screens

The Jersey City offices of Prebon.net are graced with a magnificent soaring view of Manhattan's downtown skyline. The company hopes to soon provide the world with an equally expansive view of its many different brokered products all linked together over the Internet. In early 2000, Prebon Yamane, amazed by the success of Cantor Fitzgerald's IPO spin-off of eSpeed, launched Kinetech, its own U.K-based spin-off. Composed primarily of former Prebon IT staff, Kinetech's first mission is to launch Prebon.net primarily as a voice-assisted web portal. The hope is for a three-step development marked by three acronyms: SAVE (for Screen Assisted Voice Execution), DIVE (for Dealer Initiated Voice Execution) and ELX (for Electronic Execution). The firm has a working prototype for the SAVE portion that—using a Windows Explorer look and feel—promises to move the delivery of the firm's pricing information away from traditional "green screens” and data vendors onto a Java-based web portal. One obvious advantage to this is that dealers will be able to access pricing screens from home and will potentially be able to make do with fewer services from Reuters or Dow Jones. It also allows users to cut and paste data from the pricing pages into external spreadsheets more easily than was previously possible. On-line chats between clients and their brokers are also supported, and additional news services planned. Although the technology is nice, it is simply the first step a traditional voice broker must take to stay in step with these electronic times. The second step planned by Prebon.net will be DIVE—still primarily a voice-driven way of dealing, but with broker details printing on the screen and automatically feeding into customer back-office systems. Tons of firewall issues still exist here, but the firm is furthest along with a DIVE model in the forward foreign exchange world. The working prototype of its offering (ingeniously named ForwardFX) looks pretty user-friendly, but clearly Prebon.net's vision is that brokers will still be manning the order-entry control panels for the foreseeable future. The last step—complete electronic trading—has already been designed by Prebon.net for European repos, but has yet to be released. The firm is far behind in currency options, where little work appears to have been started. With other portals such as Volbroker.com, ICor Brokerage and GFInet.com already moving swiftly into this space, currency option voice brokers at Prebon may not have the greatest job security. Indeed, the firm has recently been shedding currency option staff. —B.L.

SwapsWire Evolutionary Rather Than Revolutionary Electronic Trading

Interest rate derivatives dealers face a plethora of trade details for every swap trade they complete, and have long yearned for some sort of automatic deal capture system. They'd love to see trades flow seamlessly from an execution platform into front-office risk management and back-office booking systems. The Reuters Dealer and Electronic Broking Service have allowed this to happen in the world of foreign exchange, and it exists, of course, for various products traded on electronic futures and equity exchanges. But straight-through processing has never made it to the world of over-the-counter interest rate swaps. In a few months, bank consortium SwapsWire hopes to change all that. SwapsWire was formed in April last year, when six major banks banded together to build an electronic point-to-point swaps dealing platform. Within weeks, the group had expanded to 10 banks, and by November its ownership had swelled to 24. SwapsWire has been able to recruit every major global player to its interdealer system development. From Goldman Sachs to J.P. Morgan Chase, Credit Suisse First Boston, Citigroup, Deutsche Bank, UBS Warburg, Bank of America, Morgan Stanley Dean Witter, Merrill Lynch and others—all the big names are there as SwapsWire owners. For months now, teams from each of these banks have been holding daily meetings at SwapsWire's London offices to help design the new platform. As of late last month, SwapsWire did not have a working demo, but it promises a beta rollout of its system by late March, with the system scheduled to go fully live by May. "The core of the system's engine is already built,” says Andrew Brown, CEO of SwapsWire, "We're just putting the GUI interface in place and making sure that the ergonomics of the front end are as good as our core functionality.” SwapsWire grew out of a recognition by banks that there was a large amount of waste and a high degree of risk in swaps execution and confirmation that could be improved by using modern technology. One glance at a swaps term sheet, and it's easy to imagine even the most able-minded middle-office person's eyes glazing over during manual deal input. All the nitty-gritty details of first-reset dates, amortizing schedules, payment frequencies, stub periods, day count bases, roll conventions and averaging conventions are enough to make a trade ticket look like the most complicated of IRS tax forms. The chance of making an error somewhere between writing such a ticket, entering it into a system and confirming it is high. SwapsWire plans to streamline this by having banks query each other not by telephone or by Bloomberg messaging, as they do today, but by the platform's controlled chat environment, complete with deal templates that can be customized in various ways. In this system, dealers will be able to push these deal templates back and forth to each other, modifying proposed deal terms, while carrying on a free-form chat dialogue on the side. Swaps on the U.S. and euro rate curves are expected to be rolled out first, with swaps on other major currency curves to follow. The system will run on a standalone network, not over the Internet, with initial deployment in Europe before expansion elsewhere. Participation on the platform will require an annual fee, but as with direct dealing today, there will be no additional brokerage charges. "Our competition is not the brokerage market,” says Brown. "We just want to create a better way for direct trading to transpire with lower costs and errors.” SwapsWire itself will not likely become a huge profit center. The goal is to capture as much of the daily interest rate swaps volume that currently trades direct (estimated at 60 percent of total daily volume), simply by offering a better industry transaction engine. Want to show a swap interest to three specific banks? Just open your address book on SwapsWire, and push your proposed deal across to each of them. The recipient banks can propose prices and alternative terms—perhaps a different start date or rollover schedule—and send the template back for review. In addition, both parties can chat about the deal as the proposed trade details are simultaneously examined. "SwapsWire is basically trying to take the elements of the current swap trading methodologies—telephone, Bloomberg, and Reuters—and combine them into one system,” says Damian Kissane, managing director of e-commerce business development at Deutsche Bank London. "It's not a calculation engine. It just relays descriptions of swaps and price information. But this alone is no easy task—there are perhaps an infinite number of different types of trades with different specific terms that it must handle.” Dealers will be able to push these deal templates back and forth to each other, modifying proposed deal terms, while carrying on a free-form chat dialogue on the side. Kissane says that the free-format description of swaps used by dealers today over systems like Bloomberg or over the telephone can never show all the details of a trade, nor is there much system security around these discussions or any straight-through processing once a deal is agreed upon. SwapsWire, on the other hand, will house its all-encompassing templates and chat functionalities within an environment with extremely high perimeter security and authentication protocols. It will also offer an automatic download via FpML mapping into individual bank back-office systems. Once a bank system has received a trade, there will be an automatic acknowledgement—and an instantaneous confirmation process if the trade details match what the bank is expecting to receive. "These are not paradigm-breaking advances,” says one swaps dealer, "but it's better than what people are doing at present. It's an evolutionary step rather than a revolutionary one. The system isn't such that I stay awake at night in a buzz of anticipation, but this platform is well supported by a great number of banks. I think it's going to be a spectacular success.” In an era when electronic trading platforms are increasing market transparency for buy-side participants, SwapsWire does not immediately promise anything more than a better interbank infrastructure for dealing. Buy-side participants may be allowed into the system with time, but not from the outset. There will be no central pricing screen or any of the public reverse auctions that are becoming popular on other derivatives dealing web sites. "The goal is to reduce costs, to reduce errors and to have a technologically more advanced point-to-point dealing standard,” says the dealer mentioned above. "It's mostly about very unglamorous dealing and processing infrastructure, but this is of course very important.” The system's true test will come in how well it is accepted by traders and salespeople. Most dealing rooms are abuzz with rapid trade negotiation, with salespeople hammering away to close deals all day. "This is often nickel-and-dime stuff,” says the dealer, "and sometimes it takes real human skill to get deals to close. Our hope is that SwapsWire will be a system fast enough and user-friendly enough that people will want to transact on it. The SwapsWire partners have done the best possible job to replicate on a screen-based system all the real negotiations that go on today via other methods. But the proof of the pudding will be in the eating. It's possible that there are a few super-charged environments where it may be hard to get people away from open lines and phones.” One risk is that SwapsWire may turn into a bewildering white-board of inquiries—without the immediacy of a broker to tell the trader that the fifth deal down in his incoming stack is the one most deserving of attention. In today's voice-oriented market, if you call a bank by phone, the dealer at the other end of the line is more or less obligated to pay some attention to your interest. But if dealers get inundated with price requests on an electronic white-board, how will a dealer decide which request to address first? "Screens are just numbers,” says the dealer. "How urgent something is comes from the sound in a dealing room. To anyone with a conventional trading background, this may be a bit alien.” Another swaps dealer suggests, however, that SwapsWire won't be too different from today's Bloomberg messaging. "It should just be a more thorough, secure and complete trading environment,” he says. The system may also need some massaging when a bank wants to add details to a trade—for instance, a sales credit, a salesperson production credit or some other information—that are not originally captured as part of the trade with the outside world. In all likelihood, someone in the back-office will need to add this bit of trade "enrichment.” SwapsWire may thus enable something close to straight-through processing, but it remains unlikely that a trade will go completely untouched by human hands from inception to its first reset date. It's noteworthy that the new system specifically ignores several important steps of the trade process. SwapsWire leaves all credit usage monitoring to the bank systems, and on a post-trade basis takes no hand in rate settings or other servicing events. Clearly SwapsWire is a single-product-type system, while other e-commerce efforts seem to be moving toward a multiproduct interface. Indeed, some might even suggest that SwapsWire is a system designed by the major banks to add a bit more streamlined sophistication to interbank dealing, but without adding any truly nifty innovations or added market transparency. Taken to the extreme, someday down the road there could be antitrust concerns here. SwapsWire's ownership clearly makes it a potential behemoth market platform. And what is its competition? Blackbird has certain point-to-point capabilities labeled Blackbird-direct and Blackbird-on-demand, but these are relatively new modules within its system, and most market participants have yet to utilize them. Nonetheless, Blackbird founder and COO Shawn Dorsch is not sure if the future of the on-line trading system will necessarily be limited to single-product point-to-point systems like SwapsWire. "The impact of electronic trading is going to be bigger than anyone is appreciating right now,” says Dorsch. "In the not-too-distant future, Blackbird and other systems will be linked to enable trading across markets. Users will easily be able to electronically trade OTC swaps, exchange-traded futures and bonds against each other, and their computers will be able to automatically scan across markets and make markets in one market based upon those in another.” Dorsch believes that this linking of "pools of liquidity” should not be underestimated, and will lead to further developments in clearing and cross-margining. As a result, he says, he does not see how point-to-point systems like SwapsWire will be able to compete with more inclusive systems that are linked together. But even if Dorsch is right and SwapsWire isn't in the longer term the bee's knees in optimal system design, the sheer number of banks behind SwapsWire could give the system the critical mass to take off in the short term. Another consortium, called SwapsClear, is also making strides in its effort to tackle yet another industry problem: regulatory capital use on interdealer positions. SwapsClear would like to bring the typical 20 percent regulatory capital charge of notional value on a swap down to zero by providing a central industry clearinghouse. Could the future have banks dealing on SwapsWire but clearing through SwapsClear as a counterpart name? "Most certainly,” says a dealer. "These products are complementary, not exclusionary. They both advance the market, and I would not be at all surprised to see them overlapping in time.” —B.L.

TreasuryConnect Moving Into the White-Label Space

TreasuryConnect is a corporate-to-bank interest rate derivatives dealing platform that printed its first trade last May. The system covers all varieties of interest rate swaps, swaptions, treasury locks, assignments and swaption collars. The company has rolled out a multidealer version that has prompted 20 banks to sign participation agreements. It has also has signed up Xerox, Toyota Motor Credit and about 30 other corporates to either beta-test the system or to start executing trades in real time. The revenue model for the multidealer platform has the winning bank pay one-tenth of 1 basis point per annum in fees to TreasuryConnect. The system has traded more than $1 billion in notional interest rate derivatives to date, but that effectively represents just a handful of deals executed over the course of eight months. Perhaps because of this somewhat disappointing start, TreasuryConnect is also offering its programming prowess on a private-label basis to a number of institutions. The system has AIG, Enron, Williams Capital Group, and eVentures International among its equity investors, but TreasuryConnect does not appear to be the primary e-commerce effort at any of these institutions. Parts of the system are quite impressive. The system offers all the relevant trade information, live chat functionality and the ability to push a complicated trade template across to banks for review and pricing. But the ergonomics of the screen layouts take some getting used to: buttons and scroll-bars aren't always where you'd expect them to be, and only in the next version of the system will incoming deals to a bank stack up in a user-friendly way when multiple requests for a derivatives price arrive at the same time. For the moment, dealing with a few clients at the same time is possible, but a dealer might easily get confused between dealing conversations. The system promises the ability for straight-through deal processing on its back end, as well as interfaces with popular pricing engines—although the latter has yet to be developed. An integrated pricing engine on both the corporate side and the dealer side would certainly help spur this system to better success, since no one likes to have to re-key in all the multifaceted details of a swap trade. On a more positive note, the system has the unique ability to deliver a deal directly to a specific dealer at a bank as opposed to a trading desk in general. This overall design of the platform allows for possible expansion into other derivatives product lines at a later date. TreasuryConnect looks like a nice bit of programming, but creating a critical mass of corporate users interested in actually using the system seems to have been slow. The system needs a bit more functionality to stir up more excitement and deal flow. —B.L.