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A number of these firms are now in talks to join broker-run SEFs that are currently the preserve of incumbent dealers. The firms are attracted by the liquidity available on the exchange-like order books the platforms offer, and some plan to go toe-to-toe with the dealers as market-makers.
Prop traders are rumoured to have been refused access to the interdealer portion of the over-the-counter market in the past, where market-makers are able to tap huge liquidity in support of their client business, with the big five brokers acting as facilitators. The SEF rules have the potential to change that. Platforms that want to offer trading in the most liquid swap products will have to register as SEFs, subjecting them to impartial access provisions. This means all participants should be allowed to quote prices, as Gary Gensler, former chairman of the Commodity Futures Trading Commission, made clear last November before stepping down. Three proprietary traders and three hedge funds say they are currently in talks with broker-run SEFs.
The platforms seem to have no option but to let them in, but the head of e-commerce at one of these SEFs believes they will still remain the preserve of a small subset of firms – the dealers, with a sprinkling of prop traders and hedge funds, plus a few asset managers that need huge liquidity and are sophisticated enough to quote prices as well.
For their part, prop traders say the broker platforms are where they belong. Under CFTC rules, all SEFs will be required to offer an order book alongside the request-for-quote model that more closely resembles current OTC market practice – but in practice, market participants expect volumes on traditional dealer-to-client platforms like Bloomberg and Tradeweb's TWSef to go through on an RFQ basis almost exclusively, while the nominally interdealer platforms run by the brokers will be home to liquid order books.