Hedge Funds Break Bank Trading Monopoly

Date: Monday, September 17, 2007
Author: Luke Jeffs and Duncan Kerr, Nasdaq.com

By Luke Jeffs and Duncan Kerr, Of FINANCIAL NEWS

Investment banks have lost their monopoly to trade with one of the world's leading interdealer brokers.

GFI, one of the largest brokers in the off-exchange markets, is allowing hedge funds direct access to one of its main trading systems, a controversial move that risks alienating its largest dealing customers.

Investment banks, through their dealing desks, have had the exclusive right to trade bonds, derivatives and foreign exchange in over-the-counter markets.

The prospect of hedge funds trading directly with brokers has previously incurred the wrath of the world's largest dealing banks, which take commissions on the trades they execute on behalf of hedge funds.

Investment banks reacted angrily in May when MTS, the European government bond trading platform, confirmed it was considering admitting hedge funds after a group that included Citadel Investment Group, Vega Asset Management, DRW Holdings, Getco Europe, DE Shaw Group and Susquehanna Financial lobbied for access to its markets. MTS has yet to make a decision.

GFI took the first hedge fund trade directly on to its foreign exchange matching system in the first week of this month and has two hedge funds signed up to use the system, a source close to GFI said. It is in talks with other possible clients but the broker said it was being selective about the funds it admits, insisting they have to supply liquidity to the system.

Dealing banks have expressed concerns about trading with hedge funds as the risks are greater than those trading with other investment banks.

GFI's rivals Icap and Tullett Prebon said they do not allow hedge funds to trade on their systems, requiring them instead to trade through a dealer. BGC, another rival, did not return calls