Corporate history is littered with examples of leading companies that have been laid low by disruptive technology.

In the electronically traded swaps space, Bloomberg’s swap execution facility (Sef) has been the dominant dealer-to-client execution venue in the US since the electronic mandate came into force, recording a 55% average market share by volume for interest rate swaps in 2014, according to Futures Industry Association data.

But just three years later, Tradeweb has overtaken its rival, recording average total monthly notional volumes in 2017 of just over $1 trillion compared to Bloomberg’s $800 billion. 

There are a number of possible reasons for the shift, such as an increase in compression trades at Tradeweb or more competition in less-liquid products. But many put the dethroning of Bloomberg down to the introduction of a Tradeweb tool that allows firms to automate the trading of interest rate swaps directly from their order management systems (OMSs) – something asset managers and hedge funds have been requesting for some time. 

“It’s not enough anymore to dial into a piece of software, clunk up the user interface, pick your three dealers and do a request-for-quote (RFQ). That was great five years ago, but what the buy side is looking for now – and Pimco has been at the leading edge of this for a number of years – is getting something their equity trading desks have been getting. Finding that layer that integrates between your portfolio, your own risk systems and the execution venue itself,” says the head of electronic rates trading at a broker-dealer.

Bloomberg did not follow suit immediately, as it has preferred buy-side users to execute through its platform on the Bloomberg terminal, subscriptions for which form the backbone of the company’s revenues. It has fiercely resisted attempts to access the platform away from the terminal in the past. 

Tradeweb’s tool stops short of a full application programming interface (API) connection, which would allow for full straight-through processing and give tech-savvy firms looking for the fastest possible execution times the ability to fire their orders directly into the platform’s systems. 

But Bloomberg has now hit back, confirming to Risk.net that it began offering swaps execution via an API in the fourth quarter of 2017. The firm declined to provide any other details. While the move would propel the platform into the technological lead, some believe it is risky for Bloomberg, given how important its terminal is to its overall business plan. “Bloomberg has always had a deep philosophical problem with someone using a Bloomberg trading system without logging in through the terminal, which is what a direct API connection would do. Giving customers that automation is new,” says one senior figure at a swaps market-maker. 

Aiming for automation

Dealers typically stream or send prices via RFQ by using API connectivity to Sefs such as Tradeweb and Bloomberg, but platforms traditionally wanted traders to use their proprietary software. This forced buy-side traders to manually type their RFQ orders directly into a venue’s platform, which increases execution time and can introduce operational risks. 

But in recent years the buy side has been keen to move to a more automated execution style for swaps, like the one that has been common in the equity markets for some time. 

Tradeweb was the first to make the leap, rolling out a tool dubbed automated intelligent execution (AiEX) to certain swaps customers in 2017. It allows buy-side firms to circumvent Tradeweb’s trading screen, using an algorithm to automatically execute swaps via Tradeweb from the entity’s own OMS. It is already used in other rates products such as US Treasuries and European government bonds, as well as credit default swaps.

Tradeweb’s chief executive, Lee Olesky, says that although AiEX is only just starting to make an impact, it helped boost volume in 2017. “You have to continue to innovate in this space or you’re going to lose,” he says. “We’re automating this process just like we originally automated the process of picking up a phone to three people to get a price. We took that process and made it electronic, and now we’re going a step further.”

You have to continue to innovate in this space or you’re going to lose

Lee Olesky, Tradeweb

The company says it now has a handful of firms using AiEX in swaps and more than 50 across all products, and the tool makes up 16% of tickets for supported products. The system has been available since 2016 in US Treasuries, and now makes up 40% of the ticket count for bonds at some asset managers. For swaps, that figure has ranged from 15–20% since its inception last year. 

“How a trade is generated on the buy side has changed considerably,” says Colm Murtagh, head of US institutional rates at Tradeweb and former head of rates trading at BlackRock. “Historically, trade idea generation would happen fairly seamlessly, but when it came to executing the trade it would be held up as the trader asked the market for a price manually via RFQ,” he says.

“AiEX allows them to execute a set of trades, based on certain factors, such as a particular group of dealers, quickest response time and best price, and essentially replicates what the trader was already doing but in an automated way. So, today, a portfolio manager could come up with a trade idea and let it automatically flow through his execution desk to Tradeweb and back again without anyone touching it,” he adds. 

Tradeweb says it now has several hedge funds on board because AiEX allows them to execute swaps much faster than a manual RFQ. The typical time to execute a trade using an RFQ is around eight seconds, and lining up the trade for execution can take minutes. On AiEX the whole process can take as little as two seconds. Hedge funds are also attracted to the certainty of execution, which is upwards of 99% on AiEX compared to 95% for RFQ, says the firm. 

“Asset managers are using AiEX as an efficiency tool to bypass the execution desk or to automate smaller, odd-lot, less value-add trades. On the other side of spectrum, the key benefit for hedge funds is not necessarily efficiency and automation but speed of execution, and that group has traditionally been harder for us to attract,” says Elisabeth Kirby, head of strategy and product management at Tradeweb. 

Although AiEX is a step forward in terms of automation, it does not go as far as full API connectivity to the Sef. The tool is set up via Tradeweb and integrated with buy-side OMS systems to automate simple trades, as opposed to an asset manager having complete algorithmic autonomy via an API, which is generally more attractive to high-volume participants that want to hit streamed prices. 

However, tentative conversations between Tradeweb and some market participants about exploring swaps trading using an API-type of connectivity are understood to have taken place. 

One independent algorithmic trading developer says it is already seeing interest in connecting with an API at Tradeweb: “In the past three months, we have received unsolicited requests from existing clients and prospective ones interested in looking at the Tradeweb API. The development of API access to Tradeweb is such an evolutionary step.”

Providing flexibility 

Clearly sensing an opportunity, Bloomberg launched API swaps trading in the final quarter of 2017. This represents quite a turnaround for a company that has traditionally been hostile to entities wanting to trade anywhere but via its own terminal.

The Bloomberg terminal has been a mainstay of the trading floor for decades. It offers many trading services, such its Sef, for minimal cost or for free as long as users subscribe via the terminal and pay the $2,000 per month fee.

The company’s insistence that users trade via the terminal has caused problems with market participants in the past. When mandatory Sef trading for certain types of fixed-for-floating swaps began in the US in February 2014, for instance, some buy-side firms wanted to integrate their OMS into the Sefs, which provided straight-through processing for mostly post-trade activities. 

But as large OMS systems such as BlackRock’s Aladdin are based on different standards, this would have required changes at either end. Tradeweb bent over backwards to allow this integration, according to Glenn Barry, head of trading for derivatives and cash equities at Sun Life Investment Management, but that was not the case with Bloomberg. 

This was part of the reason that Sun Life, which uses Aladdin to manage its trading orders, chose Tradeweb as its swaps execution venue, even though it was already using Bloomberg for foreign exchange and equities trading. BlackRock declined to comment. 

Tradeweb also allowed Sun Life to decide whether or not it was legally required to complete a trade on a Sef, and to toggle between the two depending on the legal entity trading. “When we first looked at Sefs, we opted for Tradeweb because they are more flexible. The Sef allows users to be in and out of Sef mode and, as we trade under a lot of different entities, some of our entities need not trade on-Sef. Bloomberg treated some Canadian entities as a US person, and they therefore had to trade on-Sef, for example,” says Barry.

When we first looked at Sefs, we opted for Tradeweb because they are more flexible

Glenn Barry, Sun Life Investment Management

Sun Life executes all of its Canadian swaps – both on-Sef and off-Sef – via Tradeweb instead, he says. According to data compiled by the Futures Industry Association, Canadian swaps reached $289 billion in volume as of December 2017, with Bloomberg’s market share just 1.5% of that in 2017.  

Sef aggregators such as UBS Neo were also denied access by Bloomberg to prices on its Sef, as it would allow users to trade away from its terminal, while others have complained about unfair pricing practices that make it impossible for technology vendors to offer their clients a service in swaps.

While Bloomberg’s shift to using an API could spark interest from a range of market participants, some say it could open up internal conflicts at the company, given its reliance on terminal revenue. “It is risky territory, particularly for Bloomberg, as it decouples the terminal from accessing swaps markets,” says the independent algorithmic trading developer.

API technology has also been deployed at trueEX, according to the platform’s chief executive, Sunil Hirani. He says that although a “minority” of firms currently use an API, others are looking to build to trueEX’s system. “We have only had a handful of buy-side firms that are in production with us over an API, but there is a very strong pipeline of additional buy-side firms that are aggressively investing in the necessary resources to get the full benefit of automation,” he says. “In the future, more and more fixed-income products are going to be executed like that by the buy side.”

Increased competition

Bloomberg’s slide isn’t solely down to technological factors. Increased competition from other platforms has also dented its lead.

For instance, trueEX has stepped up its game in electronically traded emerging markets swaps (see box: trueEX’s emerging markets gambit).

Tradeweb has also captured a large chunk of market-agreed-coupon and International Monetary Market swaps trading, which are standardised instruments with pre-set terms for elements such as start and end dates, payment dates, fixed coupons, currencies and maturities. The platform has also picked up business in other non-standard swaps.

“Tradeweb has acquired an increasing share of trading business from some of the major domestic asset managers and hedge funds,” says Yufang Xi, a senior swaps trader at Mizuho Securities. “In particular, it has cut out a niche for itself as the go-to platform for some of the non-Sef-mandatory swap product offerings, such as broken-dated swaps and request-for-market.”

Tradeweb has cut out a niche for itself as the go-to platform for some of the non-Sef-mandatory swap product offerings

Yufang Xi, Mizuho Securities

Tradeweb also provides a tailored pricing model for accessing its liquidity that is popular with some large asset managers, according to the head of rates at one such firm. Prices vary, but fees can be a few hundred dollars per user per month with no per-trade charges, for instance, compared to Bloomberg’s per-trade fee of $10. 

“It’s not expensive for the buy side, but it’s very expensive for a market-maker. For us the cost is millions of dollars a year to be market-making on Tradeweb,” says the senior figure at a swaps market-maker. 

Others say Tradeweb’s surge could be the result of new volumes from its compression tool.  Sefs do not break out compression volume from overall average daily volume, but Tradeweb is understood to have a 50:50 ratio of compressions to new risk, with a portion of the compression volume also attributable to new risk. trueEX, the other compression provider, is understood to have a ratio close to 70:30. 

“Tradeweb has a new compression tool that may be driving some of this volume increase. Bloomberg doesn’t have anything robust on that protocol, and it’s really just trueEX and Tradeweb competing on that front,” says the asset manager’s head of rates. 

trueEX’s emerging markets gambit

While Bloomberg and Tradeweb continue to dominate trading volumes in traditional products, trueEX has carved out a niche for itself by focusing on swaps in emerging markets currencies, and attracting participants that cannot get liquidity on other platforms. 

“Just because a currency is not designated to trade on a swap execution facility doesn’t mean it can’t be made electronic,” says chief executive Sunil Hirani. 

“Even though in Mexican peso swaps dealers are quoting via an electronic request-for-quote, it is still quicker and more efficient with the benefits of instant clearing compared to trading on the phone. We want to take the high ground in all the emerging markets currencies as there is significant buy-side interest in bringing the benefits of automation to that world,” he says.

For example, trueEX has eight dealers quoting via RFQ for Mexican peso swaps, transacting $14.8 billion in notional volume from January to December 2017 , while also facilitating Brazilian real and Hungarian forint swaps totalling almost $12 billion in notional volume. By comparison, Tradeweb has recorded no volume for those currencies and Bloomberg has executed just $330 million in Mexican peso swaps. 

The Sef plans to add swaps in Israeli shekel, Thai baht, Indian rupee and Korean won during the course of 2018. 

The firm’s focus on emerging markets currencies is also the result of not being competitive enough against incumbent platforms such as Tradeweb in major currencies like the dollar. Auto-quoting of prices by dealers is common in major currencies as market-makers algorithmically respond to RFQs on a trading platform, but trueEX has only five dealers pricing that way – BNP Paribas, Citi, JP Morgan, Royal Bank of Scotland and Societe Generale. By comparison, all of Tradeweb’s market-makers auto-price swaps. 

Others, including Bank of America Merrill Lynch, Barclays, Deutsche Bank and Morgan Stanley, are understood to have signed documentation but are not yet making markets on trueEX. 

This situation hasn’t deterred some buy-side firms from giving trueEX a shot, however. “We are doing emerging markets swaps on trueEX. The breadth of their products is a lot more interesting to us than Tradeweb and Bloomberg. Tradeweb has far more auto-quoting and dealers in general, but trueEX has a sufficient number now that I feel comfortable getting my trades done. The second-tier banks are surprisingly competitive on trueEX,” says the global head of trading at one US asset manager.