Trading | Derivatives
“On the electronic side the average deal size is around $2m, but the total number of deals is vastly larger than on voice. It’s reasonable to conclude that the more electronic the market becomes, the higher the overall volume of trades. It is the same thing that happened in stocks.” Mitch Stonehocker, SunGard
The drive to electronify the market is pushing traditional firms to adapt their operating models notes Jean-Philippe Malé, head of OTC at front- end technology provider TradingScreen. “Even people who didn’t used to trade electronically will have to get onto a platform like ours; people will be badly hurt if they don’t adapt to this new world,” he says.
David Little director, strategy and business development of software house Calypso notes that although his clients are far from the HFT end of the spectrum, including many tier two and three banks, they still need to keep up with the new market conditions. “We are improving our low-latency capabilities to allow the processing of a large number of trades hitting the system at once and having the positions, risk matrix and P&L displays in near real time,” he says. “It’s far from algorithmic trading but it allows human traders to trade with confidence knowing their prices are up to date and the risk is getting calculated in near time.” Traders must be able to assess risk and determine profitability, react quickly to changes in market prices in order to manage portfolios and mitigate their market risk, and perhaps lock in profitability. That requires fast position updates, and measures of risk or P&L even if they are not using algorithmic trading tools.
“Our graphical user interface has to have some 64
of the flexibility reduced in order to allow a faster appraisal of the data; you don’t want thousands of columns in the grid,” says Little. “Those screens can still be accessed for tasks where they are useful, doing reporting for example, but a trading screen is designed to be fast and complements the slower reporting screens that you can use for offline slicing and dicing.”
The trading of instruments such as swap-
future products has required some additional work for system providers. These contracts have long-standing precedents at NYSE and ERIS Exchange, but CME and IntercontinentalExchange (ICE) launched new versions at the end of 2012, which provide firms with a way of getting swap- like exposure without subjecting them to the Dodd-Frank rules on swap trading, clearing and processing.
Malé asserts that TradingScreen has a very flexible system that has allowed it to adapt to these new products quickly. “Our platform was built in the early 2000s by removing all concept of an asset class from the core system; it can trade tables and chairs if we want,” he says. “We can create custom instruments with custom trading rules; for example with CME and ERIS Exchange we can trade interest rate, future-like contracts with very custom cash flows. We had a few weeks of work on our side to accommodate swaps of various types. We have done all of that and those
Best Execution | Spring 2013
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