Interdealer Broker to Roll out Hybrid System Across Firm

BGC Partners, a fixed-income interdealer broker (IDB), spent the end of 2007 gearing up for two important technology upgrades. The first is an internal firmwide rollout of BGC Trader, a trading graphical user interface (GUI) developed for BGC by eSpeed, a company launched by Cantor Fitzgerald (and in 1999 became a public company listed on Nasdaq), that develops and deploys electronic marketplaces

BGC, which traditionally has been a voice broker, plans to offer a hybrid model under which traders can call orders into a broker or type orders into BGC Trader. Both types of orders will interact with the same liquidity pool. The hybrid model eventually will be available across all of BGC's products but has been rolled out first with credit default swaps in Europe.

"The question everyone is asking is which products in the OTC market will lend themselves to electronic brokering," says Phil Norton, BGC's executive managing director, e-commerce. He notes that many products are voice brokered because they are illiquid or too structured, and the question is which products should the industry be looking at [for an electronic trading model].

Norton points out the success of trading credit default swaps electronically. Over the course of the past 18 months, that market has seen explosive volume and that is greatly attributable to the development and deployment of trading systems at a number of banks and brokerages, he notes. "No one in their right mind would have ever expected to see volumes in the CDS space that we're seeing now," Norton notes.

Some could say BGC is preparing for a similar explosion in volume as it prepares to roll out its hybrid model across all products. However, "You can't just assume because [introducing an electronic platform] worked for CDS that it's going to work for interest rate swaps or any other product," Norton is quick to caution.

"For us, we don't actually care whether a product goes electronic; what we try to do is just create two solutions — a trading system, and the other would be the voice broker," Norton continues. "We say to our clients, 'You have a choice: Either pick up the phone and call a broker, or enter your trade into the GUI.' We get the trade either way."

Following the rollout of the hybrid system for credit default swaps in Europe, BGC now is rolling out the system for FX options in both New York and Asia.

Though the interdealer-broker market has evolved over the years, still less than 20 percent of the industry's revenues come from electronic brokering. However, Norton says he can see that number rising in the next few years to 50 percent to 70 percent. He notes that industry reports support this claim.

Most interdealer brokers first went from pure phone transactions to creating direct lines to banks. Then the process evolved to the point where brokers would take in orders via phone and type them into an electronic system —which also could be viewed, but not manipulated, by traders. And now, finally, GUIs are being introduced to enable traders to transact on their own. However, electronic trading has only taken off in the CDS market thus far.

In order to further the firm's electronic efforts, BGC hired Clive England as director, head of e-commerce, for BGC in North America in the fall. "The position was newly created to support the growth of BGC and BGC Trader," says Norton, to whom England reports.

England will be charged with rolling out the technology to all of the firm's brokers in North America over the next two years including FX options, US Treasuries, CDS, as well as adding new tradable products that come in the US. He also will be tasked with helping the trading system evolve.

England notes that already, in its short life, BGC Trader has had five versions or upgrades, so he fully expects the product to continue to evolve as the market and needs of the brokers evolve.

England was tapped as a result of his experience in Europe with BGC competitor GFI, which is known to have done a good job in implementing electronic brokering in Europe for the CDS market.

BGC's second technology upgrade will occur once the firm finalize a planned merger with eSpeed. (Technically eSpeed is acquiring BGC partners in what is known as a reverse acquisition. The new company will be called BGC Partners and will trade on the Nasdaq.) The acquisition will allow BGC to make further in-house enhancements to BGC Trader as electronic brokering in the IDB market evolves.