Dealers Gain TradeWeb Stake

The initial contract was signed Oct. 10 and is expected to close between November and the end of the year, says Billy Hult, managing director, head of U.S. markets with TradeWeb.

The nine dealers are the original backers of TradeWeb-Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch and Morgan Stanley-as well as the Royal Bank of Scotland (RBS) and UBS.

In addition to the base investment, the dealers will invest an additional $100 million to help develop support for new asset classes on TradeWeb, says a source familiar with the situation.

TradeWeb parent company Thomson Financial also agreed to transfer its AutEx indication-of-interest (IoI) network and Thomson Order Routing network assets to TradeWeb, say vendor officials.

"The idea is to create a global multi-asset class business," says a TradeWeb spokesperson.

Under the terms of the deal, TradeWeb's management team will remain intact, with CEO Jim Toffey, president Lee Olesky, and Hult maintaining their current positions within the firm. However, with the inclusion of the new Thomson assets, TradeWeb expects to grow its headcount from its current 325-member staff to a 450-member staff.

One of the major drivers for the dealers' investment, which has been in the works for over a year, is to build out TradeWeb's global interest rate swaps platform, says Hult. "The vast majority of interest rate swaps trading is still transacted on the phone today-our major goal will be to migrate that to electronic trading," he adds.

The new investors are expected to begin participating on TradeWeb's electronic interest rate swaps trading platform beginning in the first quarter of 2008, says Hult.

Industry watchers are not surprised by the announcement, which was made late last week.

"Certain products, such as single-name credit default swaps (CDSes), are ripe to go fully electronic, but we haven't seen much electronic trading in them since dealers have no incentive to do it," says Sang Lee, a managing partner with research firm Aite Group. The dealers' investment in TradeWeb gives them a stake in how the trading of the instruments is done and how the market will evolve in the future, he adds.

Moving beyond CDSes, TradeWeb "will spend time working with the banks on the right strategy in global credit with a particular focus on credit default index (CDX) trading," says TradeWeb's Hult.

Thomson officials decline to comment about the closeness of their announcement to the expected fourth quarter launch of dealer-backed interest rate swap and U.S. government bond liquidity aggregator LiquidityHub, which is backed by all of TradeWeb's investors except for Credit Suisse. A LiquidityHub spokesperson also declines to comment.

According to Aite's Lee, TradeWeb has nothing to fear from LiquidityHub. "Any industry-led consortium is more often prone to failure than success," says Lee. "TradeWeb already has an infrastructure in place, which LiquidityHub does not," he adds.