Tradeweb treads fine line as API trend brings challenges

A growing number of buy-side firms are taking more direct control over their execution of rates products on Tradeweb without visiting the platform itself. It’s a trend that is seen by some as the first step on a slippery slope—albeit a small step, and a long slope—that leads to irrelevance.

Every fixed income trading venue’s fear is that—like an online retailer—customers will eventually use an Amazon-style aggregator to access their liquidity and compare prices, rather than visiting the various shops individually. In this imagined future, enabled via widespread trading through application programming interfaces (APIs), the venues lose the direct relationship with their customers, and have less ability to set and collect fees. It’s why they have traditionally required users to log into the user interface (UI) to complete execution.

“If they open up the pipes and say, ‘We’re just going to pass everything down to your execution management system (EMS)’, and then Bloomberg do and MarketAxess do, the trading venue starts to become irrelevant—it’s just where the liquidity is,” says an e-trading head at one large dealer.

“That’s what everyone is paranoid about.”

As a way around the requirement to use the UI, many turned to Tradeweb’s AiEX tool—a kind of Tradeweb-regulated API that allows automated trading from the EMS but doesn’t allow users to officially execute from there.

If they open up the pipes and say, ‘We’re just going to pass everything down to your execution management system’ … then the trading venue starts to become irrelevant

An e-trading head at a large dealer

But as buy-side firms look increasingly to trade rates products systematically, a growing number have become attracted to the idea of trading via direct API and taking more control over their execution, and it’s understood that a handful of firms started to trade this way from the middle of last year.

Sources close to the venue say there has been no change in policy. For a decade, customers have technically been able to use Tradeweb’s direct API for trading government bonds and interest rate swaps, and it has been used on and off. However, the effort involved was a deterrent and uptake minimal, as AiEX has ended up delivering most of what they need after all.

Sell-side and technology vendor sources, however, insist that there has been a change in view from the platform, and that it is now more willing to allow certain buy-side firms to interact with dealers via direct API without opening the UI. Some frame the recent moves as the first step in an eventual march toward aggregation in the fixed income market.

One crucial protection remains—users of the direct API are still barred from using it to fuel price comparison with other venues, which for some, is one of the key use cases.

“You can’t compare MarketAxess with Tradeweb quotes, and you definitely can’t compare them with direct quotes, which ultimately defeats the purpose of liquidity transparency,” says a source at one tech vendor.

Feeling un-API?

AiEX allows users to send orders to the venue via API, with trades of a certain size then sent automatically to dealers for quotes. The dealers are selected based on pre-set criteria, and the trades are executed if the best price is at a target level. These parameters can be adjusted via API, but the trades are still officially executed within the venue. And if something goes wrong with the execution, users have to log into the Tradeweb interface manually.

The direct API approach allows firms to obtain the quotes and execute directly from their own EMS, which may be more suitable for firms running systematic strategies across multiple asset classes.

At least one hedge fund is said to have started trading interest rate swaps this way from a custom-built EMS in the middle of last year, while a handful of asset managers are using the API to trade government bonds.

The number of buy-side firms using the API for execution at this point is believed to be small. One reason given is Tradeweb’s usage restrictions, which bar buy-side users from comparing the quotes obtained via its API against rival venues and other dealers’ bilateral prices in their EMSs.

Another is the technology costs needed to connect to the direct API. “[Tradeweb] don’t market it—it’s selective,” says the large dealer’s e-trading head. “But equally, there aren’t many [that want to use it]. It’s a complex protocol and Tradeweb works so well, so what’s the upside in an 18-month project?”

AiEX has proven popular with clients, he says, and API execution would have to provide significant additional benefits to justify the time and effort required to build connectivity.

Dealers must also give permission for clients to access their quotes through the API. Some are reluctant to do so.

An e-trading source at a tier-two dealer says they prefer to establish direct links with clients through a connectivity service, such as TransFicc. “Our strategy at the moment—and this isn’t Tradeweb specific—is that if anyone is looking for API access, either as a read-only on our rates or axes or as part of an execution workflow, we wouldn’t agree to enable the client over Tradeweb. We would pursue a bilateral link with them.”

A spokesperson for Tradeweb says it has long offered a way for clients to connect without using the UI, such as via AiEX, and it has observed an uptick in interest from some clients in using their APIs to deploy more systematic strategies.

“However, the vast majority of Tradeweb clients continue to use the UI whether or not in conjunction with our AiEX solution. As always, we work with our clients to determine the best approach that suits their needs,” says the spokesperson.

Fear of irrelevance

In other markets, such as spot foreign exchange, buy-side firms can easily fire request-for-quotes directly to trading venues from their EMSs, where they can compare prices from different venues side-by-side, automate execution and run pre- and post-trade analysis.

Electronic fixed income trading venues have resisted this model. In general, a buy-side firm can stage a fixed income order onto a venue via API but must then log into the platform’s front end to execute it. This has allowed fixed income platforms to build a more captive customer base. But the increasing use of direct API trading could eventually change all that.

Buy-side firms have long relied on their order management systems and trading venue front-ends to provide them with the broadest view of the fixed income market when seeking liquidity. As the rates market structure becomes more electronic, it has paved the way for the entry of EMS providers, such as Portware in 2021 and Ion last year.

Adoption of EMS-based execution is still relatively small, though. A recent survey by Greenwich Associates found that only 39% of buy-side firms use an EMS for fixed income trading, and of those, just 12% use a true multi-venue, built-for-purpose EMS.

The end result of this market structure is the FX world. Liquidity is [currently] only aggregated in one place for reasons that are not benefitting the end-investor

Source at a technology vendor

Full EMS integration would, in theory, allow a buy-side firm to send RFQs to multiple venues and compare the resulting quotes on screen, which would set the venues on the path to being aggregated.

Sell-side and tech vendor sources say that, even with the current restrictions on comparing quotes, the slow embrace of direct API trading will eventually result in fixed income trading coming to resemble FX.

“The end result of this market structure is the FX world. There’s only one way it’s going to end up. Liquidity is [currently] only aggregated in one place for reasons that are not benefitting the end-investor—they’re benefitting someone else,” says the tech vendor source.

Broad adoption of APIs could also end up pushing clients towards trading directly with dealers in the future—a possibility that is flagged in the ‘risk factor’ section of Tradeweb’s annual reports. For this reason, a fixed income e-trading head at a second large dealer expects Tradeweb to exercise caution in expanding access to its direct API.

“They wouldn’t accelerate blanket API access to all of their products because if they were designing integration on the client side, they would be coding to standards that could abstract them from the execution venue, and a client could easily switch over to a liquidity provider directly,” he says.

Others claim the recent arrivals onto the direct API were linked to the emergence of Project Amber. Conceived in mid-2021 by a consortium of 12 dealers concerned about the rising trading fees and lack of connectivity options at venues such as Tradeweb, Amber would have offered full EMS integration via API and the ability for users to run analytics on their RFQ data.

That project fell apart earlier this year due to disagreements within the consortium. But sell-side sources claim the threat of Amber was enough to convince Tradeweb to be more accommodating of requests to use its direct API.