Slow uptake of electronic trading of swaps slows Virtu’s expansion plans
Virtu's plans to expand its market making services into the interest rate swaps market has not progressed as expected due to the slow development of electronic trading in the OTC derivative market for swap execution facilities (SEFs). Order book trading accounted for just 6% of total SEF activity as of December 2015 according to Greenwich associates, with Citadel the only non-dealer to make any real progress in breaking into the market still largely dominated by banks.

Proprietary trading firm Virtu Financial has struggled to expand its market making services to the interest rate swaps market, according to its chief executive.

Speaking to The TRADE Douglas Cifu, chief executive of Virtu Financial said a slower than expected uptake in electronic trading of OTC derivatives on swaps execution facilities (SEFs) has hampered its ambitious plans.

“We’ve made some progress, but it’s going slower than expected,” said Cifu.

“If you had asked me three years ago what a SEF would look like now and how many would be successful, I would have said there would be more electronic trading, liquidity and swaps executed on SEFs – but that hasn’t happened.”

Virtu first announced its intentions to expand into swaps market making in 2013, as it looked to take advantage of the rules pushing trading traditionally executed over the phone onto electronic venues.

It then began executing interest rate swaps on a broker-run central limit order book (CLOB), joining Citadel Securities as one of only two non-banks known to have done so.

However, order book trading has not developed as quickly as many anticipated, with only 6% of total SEF activity was executed via CLOB, as of December 2015 according to Greenwich Associates.

“So, until big buy-side institutions start trading more electronically, as they have done in equities and the currency markets, that market place isn’t going to work for us,” added Cifu.

“There wasn’t a regulatory barrier for us, but more operational.”

For Virtu’s swaps market making expansion to take off it may have to register as a swap dealer, an onerous and expensive process.

Citadel is the only non-dealer to make any real headway in breaking a market dominated by banks.

Read The Trade’s full BIG Interview with Douglas Cifu here.