OTC derivatives reform will lead to algo boom

Abstract

Reforms being implemented in the derivatives market will lead to a dramatic rise in the use of algorithms to execute over-the-counter (OTC) trades, dealers predict. A requirement in the Dodd-Frank Act for all clearing-eligible contracts to be traded on swap execution facilities means the lion's share of OTC volumes will flow through an array of new electronic trading venues in future. As a result, standardized trades will be more common and the bid/offer spreads will be tighter, making it harder for dealers to compete on price alone. Algorithmic execution is already common in equity markets, and has been growing steadily in forex.