GFI Tempts CDS Traders to Computer with Screen-Assisted Auction System
November 16, 2009
GFI Group is trying to lure reluctant U.S. credit default swap traders to a "screen-assisted" approach to CDS trading that involves an auction, using both phones and computer screens.
GFI brokers call traders on the phone at the banks and collect bids and offers from them on CDS contracts linked to a certain industry sector. GFI calculates an average price based on the bids and offers it receives and places the price onscreen to which counterparties can agree to click to trade, or execute over the phone.
The auctions typically involve single-name swap contracts linked to credit risk on the debt of 10 to 15 different corporate names in a single industry, like financials or media firms. The frequency of these auctions is based on daily phone polling of 10 or 12 dealers to find "where the flow, the interest is," says Francesco Cicero, GFI's head of e-trading. GFI hopes culling an average price and placing it onscreen will spark trading on contracts that otherwise might remain unmatched.
"So instead of starting the process with a bid offer that's very wide and try and narrow it down to find a level to trade, we begin by finding the ideal mid-level and invite people to trade there," Cicero said. "With limited liquidity and less dealers, that's actually the best thing you can do is aggregate people around certain credit at a certain time."
Otherwise, he said, "a lot of people end up sitting on a bid or offer that's very wide for a long time and never really find that ideal level that gets traders comfortable with trading. So we decided we would bypass some of the negotiating drama, if you will, and cut to the chase.
"It's more about psychology than some kind of e-trading science," Cicero added. "The most difficult thing to change is the human behavior: People are used to working a certain way. So we thought we'd start by introducing electronic trading in a less threatening way."
