Creditex Deep in the Garment District
Derivatives Strategy, February, 2001

Tucked away in a vintage garment-district building in a fourth-floor room hot enough to recall the sweatshops of yesteryear, 20 computer programmers from Creditex, the credit derivatives trading web site, are toiling in an ever-continuing effort to make its product the niftiest in its class. Five floors above, in similar conditions, another 20 Creditex customer relations managers help clients learn how to avail themselves of the system effectively.

The digs may not be great, but the programming is. In an age when many others are still showing off mock-up prototypes, Creditex chief technology officer Jim Miller has put together a live system with a wonderful look and feel. Creditex volumes still may not rise much above a handful of deals a day, but if an electronic platform can succeed in the complicated credit derivatives market, Creditex will likely be it.

The firm has found primary funding from a group of banks within the industry, including J.P. Morgan Chase, Deutsche Bank, Morgan Stanley, UBS, Bank of America, and Credit Suisse First Boston.

credit derivatives are among the most complicated products out there. Restructuring terms can vary widely along with a whole host of other default verbiage. But Creditex handles all the different versions of documentation admirably, via a number of special columns that quickly let the trader know whether restructuring is included as a credit event or not. A user can also create any number of core documentation templates and then perform an electronic comparison to the terms of a potential counterpart. At the first level of detail, there is a checkbox exception report highlighting any differences between the terms. A user can drill down deeper to view a counterpart's summary term sheet or, if a dealer desires, a full term sheet.

Creditex volumes still may not rise much above a handful of deals a day, but if an electronic platform can succeed in the complicated credit derivatives market, Creditex will likely be it.

Trading takes place on one central screen that can be sorted by the best bids and offers per credit, or in a more detailed manner to show all activity and market depth. As with its competitor, CreditTrade, Creditex allows users to search for specific credits any number of ways-by geographical location, by trade date, by rating or by market sector-and the system offers a detailed trading history extending back 25 days in its Trade-Tracker module.

A host of specialty icons also highlight whether a deal is under negotiation, or has special terms attached to it. Recently, the firm added a "fast mover" designation in the form of a small runner that can appear next to a bid or offer for traders who want to post a price that is dealable for a short period of time, but that then becomes a strong indication of interest rather than a hard commitment to trade. This is a nice "check-back" facility (also present in other sophisticated derivatives systems such as ICor Brokerage and Blackbird) suggested to Creditex by a few of its bank users.

Compared with CreditTrade, there is no clunky reliance on the exchange of e-mails for this system to work. E-mails are still sent when someone counters a bid or offer a dealer has shown, but they are only used as a back-up facility to the live screen and personal Inbox posted in a panel directly next to the trading screen. It is within this Inbox that dealers can negotiate and chat back and forth between themselves, and where any action on a dealer's price is likely to first draw attention. The platform is open to both bank and non-bank clients, and trading is enhanced by trade facilitators located in New York, London and Sydney.

Perhaps the only design fault is that the primary trade-entry screen is separate from the trade-monitoring screen, with no Inbox appearing on this second page. This means that a dealer entering prices might accidentally miss something trading in the market. The slower pulse of credit derivatives trading may not make this a big issue most of the time, but it would be better if Creditex could move this trade entry to the bottom skirt of the main dealing window, as well as allow dealers to enter new proposed trades on the fly by clicking on the actual dealing screen. The company says both of these improvements are under design.

Like traditional voice credit derivatives brokers and CreditTrade, Creditex charges a standard brokerage fee on completed deals that averages one basis point per annum, but varies on a sliding scale depending on the level of the credit default swap traded. A credit default swap trading at 25 basis points per annum costs less to trade than a credit default swap that is 400 basis points bid. Although Creditex is already growing nicely, one wonders if the firm might attract even more bids and offers to the site by moving to a pricing model like Blackbird's, where only aggressor-interests pay. Dealers may still be searching primarily for simple liquidity in credit derivatives, but this would help to further differentiate Creditex's attractive platform.

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