Risk: OTC trading platform innovation of the year: Tradeweb AiEX

Risk Awards 2019: Expansion of automation tool to swaps trading supports soaring derivatives volume

Hollywood has a term for it: a sleeper hit. Likewise, Tradeweb AiEX’s foray into swaps may have had an inauspicious start but its success in 2018 has made it one of the financial industry’s breakout stars.

Tradeweb is the first platform operator to deliver a credible automated trading offering for swaps, through an extension of its AiEX tool to indexes on interest rate swaps (IRS) and credit default swaps (CDS).

While AiEX has been available for swaps trading since June 2016, the technology proved its mettle in 2018, accounting for a growing chunk of Tradeweb’s derivatives flow. Swaps activity on AiEX was up 87% in the first 10 months of the year compared with the whole of 2017.

Tradeweb does not disclose user numbers, but buy-side firms using AiEX say its main benefit is in liberating resources by automating the often sizeable portion of their flow for which human intervention has long been the status quo but is not necessarily essential.

“AiEX is still unique among the dealer-to-client platforms and it has allowed us to cover the markets more efficiently,” says Edward Mann, product manager at Systematica, a technology-driven hedge fund spun out of BlueCrest Capital Management in 2015.

“By using AiEX to automate our smaller flows in IRS and CDS indices, we can free up our traders to focus on the larger tickets that require more attention. Its great strength is in mimicking the human trader by requesting quotes from three banks and taking the best price within the tolerance we have set.”

Following implementation of the second Markets in Financial Instruments Directive (Mifid II) in January 2018, Tradeweb enjoyed a stellar year, with trading activity rising across asset classes. In October, the group achieved average daily volume in interest rate derivatives of $112.8 billion, well over double what it was a year ago, while credit derivatives volume was up by nearly 90% at $9.8 billion.

Although not solely responsible for this strong performance, AiEX is an example of the kind of innovation that has supported the surge in volumes.

When AiEX was originally launched in 2013, it answered a pressing need for automation in bond markets. Tradeweb believes the extension into swaps may create additional trading opportunities as clunky manual processes are eliminated.

“When we launched AiEX for bonds, it was very specifically targeted to free up traders’ time by automating low-touch business,” says Charlie Campbell-Johnston, head of integration and workflow tools at Tradeweb. “But for swaps it has allowed clients to access liquidity in a faster, more efficient way, automating key processes such as clearing certainty checks. This has created an opportunity to add new trading flow that may not have existed previously, contributing to our volume growth.”

One of the inherent challenges for buy-side trading desks is that they typically rely on an order management system (OMS) to process trades, but many of the standard OMSs tend to be broadly tailored towards the requirements of cash products and can struggle to deal with swaps as efficiently.

“Identifying individual transactions and sending relevant messages is more complicated for swaps than for bonds, while doing a request-for-quote can involve more manual steps in staging the order from the OMS to Tradeweb and back again. By removing these obstacles, we have been able to open doors with both new and existing clients,” says Campbell-Johnston.

Given the growing focus on creating efficiencies and automating processes, it is perhaps surprising that Tradeweb is the only platform to have made real progress with the automated trading of swaps. But while the concept is fairly straightforward, turning it into a reality has involved extensive technology development and industry collaboration.

“When compared with small bond tickets, the risk derivatives carry on execution is far greater, so we developed AiEX to manage that risk and maintain a controlled environment that reduces execution risk while enhancing performance. That has involved a lot of technology and intellectual property and is less simple than it might appear on the surface,” says Enrico Bruni, head of Europe and Asia business at Tradeweb.  

Beyond the innovation of AiEX, Tradeweb has achieved broader success in swaps trading in recent years, zooming past Bloomberg to take the lead as the largest swap execution facility and growing its increasingly popular trade compression service. Brexit will present its own unique challenges, but Tradeweb is taking the same methodical approach to the UK’s rupture with the European Union as it took in its preparations for Mifid II in 2017.

The company is in the final stages of securing regulatory approval to operate a multilateral trading facility (MTF) in Amsterdam to serve customers in the 27 EU member states that will remain after Brexit, and has been ramping up its operations in the city, where it will trade alongside competitors Bloomberg and MarketAxess.

“The greatest challenge has been managing the uncertainty around Brexit, but we now have a fully fledged operational presence in Amsterdam and have had very good engagement both with the dealers and the buy side, so we should have liquidity on the EU MTF from day one,” says Bruni.