UBS has sparked controversy in electronic trading by becoming Bloomberg?s sole provider of dealer-to-client execution in exchange-traded derivatives (ETDs).
Other banks, which are themselves large clients of Bloomberg?s, will be able to keep the ETDs trading pages that they have run for several years on the network. But those pages are now for the banks? own use only, as UBS is the exclusive provider of direct market access (DMA) services for ETDs on Bloomberg Tradebook.
That means that over the next few months, other banks will have to migrate clients that use Bloomberg as an execution medium for ETDs to their web-based tools. However, banks will still be able to provide order-routing services to their clients for exchanges of which UBS is not a member.
Sharing revenue
The initiative went live in March, after 18 months of negotiations, and it will take several months to assess the results, both for UBS and for Bloomberg.
It is an interesting strategy. Aside from UBS, firms including Lehman Brothers, Deutsche Bank and JPMorgan have run internet-based trading applications linking to dozens of exchanges for years, on the internet as well as on Bloomberg. The platforms competed on tiny differences in pricing and execution speeds, on sophisticated trade-legging functionality and on the number of exchanges they connect to. The offerings were largely the same, acting as order routers from the client?s trade request, through the bank?s exchange membership, to the exchanges.
Now the banks? trading applications compete on analytical functions and integration with other products such as bonds and equities. Those web-based tools will be even more important to the banks now. UBS will keep its internet offering, giving it more flexibility in execution platforms.
The bank also wins access to thousands of potential new clients through Bloomberg and both sides will promote each other as best provider of services. Although the bank cannot accurately predict whether it will achieve a greater market share in ETDs trading, it is optimistic. ?It will either do well or very well but we don’t see how it can damage our network and it can’t damage Bloomberg,? says Steve Sparke, global head of ETDs at UBS. To start with, the platform offers direct market access to contracts on Liffe, the CBOT, the CME and Eurex, but it will be expanded to encompass all major fixed-income and equity exchanges. ?There is a chance that this will become the market standard for accessing the high-volume, highly liquid futures contracts,? says Sparke.
Bloomberg gets to add ETDs to the products already transacted on Tradebook. But the project has raised some eyebrows. ?What message does this send?? asks one non-UBS banker. ?If a client was sold the old UBS system as the best thing since sliced bread, I don?t understand saying ?move to Bloomberg?.? And he adds: ?What did UBS have to put on the table for this?? A slice of the commission on trades ? a deal other banks find unpalatable.
?We will have a revenue share with Bloomberg because it is Bloomberg providing the system,? explains Sparke. ?This way, Bloomberg gets some revenue out of the deal in order to maintain and develop the system.? That sounds fair, as Bloomberg?s substantial customer support network and high levels of reliability do not come for free, but it does blur the line in perceptions of Bloomberg, making it look more like a broker that competes with its own member banks than an information and trading network that serves them.
Bloomberg was not available for comment.
