Both regulatory constraints and large trade sizes are hampering the entry of nonbanks - primarily prop trading firms - into the interest rate swaps markets.
Some of the biggest computerized-trading firms are facing obstacles as they try to move into interest-rate swaps, a $381 trillion market that has yet to be dominated by automated buying and selling. Regulations passed after the financial crisis that should make the interest-rate swaps market a more natural fit for electronic market-makers also created barriers to entry. Under the 2010 Dodd-Frank Act, market makers must register as swaps dealers...or never deal in swaps that aren’t guaranteed by a clearinghouse. One firm that’s already made a move is Citadel LLC, which last year began making markets in rate swaps. Hudson River Trading, Virtu Financial Inc., KCG Holdings Inc. and DRW Trading Group are all at various stages of heading into swaps.