Inter-dealer brokers go online
Financial Times, March 22, 2004

By Jenny Wiggins in New York Published: March 21 2004 17:11 | Last Updated: March 21 2004 17:11

Inter-dealer brokers have started to trade credit indices online, helping attempts to increase liquidity in the credit derivatives market.

The emergence of two benchmark indices in the credit derivatives market over the past year has been a huge boon for the derivatives business because it has given investors a simple way of getting in and out of a very complex market.

The indices, known as "iBoxx" and "Trac-x", compile credit default swaps for different companies and are considered a form of "easy entry" to the market, said Andy Brindle, head of credit derivatives for JP Morgan.

Creditex, which started making markets in the indices online in New York last week, says it has seen as many as 30 trades per day and as much as $750m of daily notional volume. It already claims a 25 per cent market share of the credit indices inter-dealer market.

"We were not expecting the take-up to be this fast and this aggressive," said Creditex chief executive Sunil Hirani.

One trader at a big investment bank said that he was pleased to see Creditex trading indices online because its broker-dealer services were much cheaper than traditional broker-dealers. He said that the cost of a transaction online could be $500, as opposed to $2,500 through a voice broker.

Trading derivatives, like other debt products, has always been difficult and costly for investors because the trades are conducted in "over-the-counter" markets - over the phone and via computer - rather than on exchanges, like stocks.

Dealers who have tried to improve liquidity by making markets in individual corporate bonds and derivatives online have struggled. But strong investor interest in the credit derivatives indices has given online broker-dealers fresh hope.

Analysts said that the emergence of online trading for derivatives indices could help the derivative market's liquidity in the short term, but that it would receive a bigger boost if its products were traded on an exchange.

"Market participants would [then] have the ability to trade electronically anyway," said Adam Josephson, an analyst at Celent Communications.

IBoxx and Trac-X, which were set up by different groups of securities dealers, are trying to obtain access to exchanges but negotiations have been hampered by merger discussions between the two index groups.

GFI, the largest inter-dealer credit derivatives broker and a competitor to Creditex, said it also offered investors the ability to trade indices online.

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