Indicative Quotes and Executable Liquidity in OTC Swap Markets

# Why Isn’t There a Real Order Book for SOFR Swaps?


# Why Isn’t There a Real Order Book for SOFR Swaps?












For some OTC products like SOFR swaps, there are order books, but these appear to provide only indicative quotes—meaning they cannot be directly executed. I believe ICAP provides such order books for SOFR swaps.

Apparently, similar indicative order books exist for corporate bonds as well.

I couldn’t find much literature on this topic online, which seems surprising. This raises a few questions:

- Why would someone post quotes if they are not executable?

- Are market participants obliged to post these indicative quotes?

- Can participants intentionally mislead others by posting off-market quotes, given that they bear no execution risk?

- Why not create a fully executable order book for SOFR swaps (e.g., for maturities of 2y, 3y, 5y, etc.)?

I’d love to understand more about this practice. Additionally, which platforms provide these indicative order books? I believe ICAP does for swaps, but are there others?

## Answer by Attack68 (score 5)

https://quant.stackexchange.com/a/82109

There are two markets;

- D2D, i.e. interdealer market-maker to market-maker market. These markets operate via interdealer brokers and those brokers do have some systems in some markets creating executable orderbooks. Otherwise voice prices are executable. Indicative prices in these markets would not work because there is a symmetery between counterparties, and indicative prices would create asymmetry on dealing.

- D2C, i.e market-maker to price-taker. I assume this is the market regarding your question.

The objectives of market-makers and price-takers is to make profit.

Who would benefit if a market-maker streamed executable prices in large size to an orderbook on a public venue such as Tradeweb or Bloomberg? Most likely price-takers, because all they have to do is wait for the right opportunity and "pick the market-makers off". As a response to losing money market-makers would likely switch off the service or widen prices. I have seen this frequently happen in other types of trading. (If you are interested David Fotheringhame took his bank to court regarding redundancy and, as public record, declared a number of things about FX auto-executed trading and toxic flow in court which is easily obtained)

When is it in the interest of market-makers to stream executable prices? When they can control the venue and obtain synergies. As an example JPM targets this exact type of strategy. In their case they establish dedicated lines with their main clients who are interested in the infrastructure. This secures them;

- Direct access to committed clients, because the investment to setup the dedicated line and integrate it is an onboarding hurdle,

- No trading fees with Bloomberg and Tradeweb,

- Confidential trading, since the size and trade direction will not be known or reported to any third party (except the SEF after the maximum amount of permitted time)

- Confidence in the integrity of the client. The client understands that the liquidity and executable prices will be withdrawn if they misuse it, so there is an element of protection to the market-maker.

Is it likely to see auto-executable prices on CLOBs or Tradeweb or Bloomberg venues anytime soon? In my view: no. Because for a market-maker it's dangerous and they have better incentives to work with clients directly.

On the flip side, price-takers who are large enough have the economies of scale to setup their own in-house orderbooks by aggregating across all possible trading venues and dedicated lines. For example I would expect Blackrock easily has executable prices streamed to them on multiple channels.