Q-WIXX Launch Caters to List Traders of Credit Default Swaps

With investment managers and hedge funds trading long lists of single-name credit default swaps (CDSs), last week's launch of Q-WIXX, an electronic platform, is gaining traction among the dealers and bringing more efficiency to the auction process.

Q-WIXX is set up to help dealers, correlation desks, prop desks, hedge funds and other buy-side market participants execute transactions known as Offers Wanted in Competition (OWICs) or Bids Wanted in Competition (BWICs).Over the past two years, the use of lists among the buy-side has exploded for use in hedging, dispersion trading and correlation trading, according to Brad Bailey, senior analyst at Aite Group. Buy-side firms might use the CDSs to hedge a portfolio or take a particular view on the market, says Bailey.

While Q-WIXX requires a minimum of 20 names in each list, Bailey says these lists could literally contain hundreds of credit default swaps that the buy-side firm wants to buy or sell and they also want to price these different instruments.

"This is market changing technology," commented Stephen Grady, global head of trading at hedge fund manager Fortis Investments in the release. "Q-WIXX list execution, combined with T-Zero post-trade processing, provides buy-side institutions, such as ourselves, with the ideal end-to-end solution," added Grady.

Major credit derivative dealers have joined the platform including BNP Paribas, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Merrill Lynch, and UBS. In addition, there are four more dealers in the pipeline.

The bids are distributed to participating dealers via a network used actively by more than 1,000 CDS traders at the top 20 major dealers in the U.S. and Europe, said the release. This allows the buy-side to obtain competitive pricing from the dealers, which provides clients with live prices, reduces communication and execution time. According to Q-WIXX, the traders that typically took hours can be done in minutes with less market risk for both the buy and sell side.

After the buy-side sends these lists to the dealers, "It takes them tremendous amount of time to go through these lists and for the sell-side to get all these people online. It could be multiple traders on separate desks and separate countries," that review the credit default swaps, he explains. In terms of the sell-side, they can share the lists with various desks. "It's really cutting back on a lot of operational risk and operational inefficiency in going through these bids and offers," says Bailey. For example, a trader at Goldman Sachs in London can price the European credit default swaps, say Vodaphone, while the New York based Goldman trader could handle the U.S. credits, like GMAC or GE, says the analyst.

"They've definitely identified a pain point in the market," adds Bailey.

With Q-WIXX, "It's almost an auction marketplace," says Bailey. The buy-side can preference the dealers - a firm can go to four dealers; the sell-side responds and after a certain period of time, the buy-side firm picks the best price," he says.

Because there is a fixed time for the auction, "It allows the buy side to make sure they're going to get everything they want in a reasonable time and make sure that the dealers are willing to commit for a certain amount of time," he says.

Currently, the execution and post-trade processing of these bulk lists is handled manually, takes several hours and is prone to errors. This involves preparing and distributing spreadsheets, taking apart the spreadsheets to enter prices and re-aggregating them. "There's a lot of errors, the dealers are under a lot of time pressure and they don't want to make mistakes," says Bailey.

T-Zero, another spin-off of Creditex Group, is providing the post-trade processing. "They (T-Zero) can feed all the information for processing the trades into DerivServ," says Bailey referring to the DTCC's confirmation service for OTC derivatives. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio