By Russell Levens, US Head of Customer Engagement – Cleared Derivatives, ION Markets.
The S&P 500 index recently recorded a new peak in one-month daily volatility, unmatched since early July. Simply put, the industry has tracked a record number of price swings to the upside and the downside, all of significant magnitude, at a time when daily trading volume continues to surge.
Over the past two years, record volumes have tested the derivatives industry in ways not seen since the 2008 financial crash. During the last six months alone, rising interest rates have generated huge swings in pricing and valuation across assets historically seen to be ‘stable’. Against the backdrop of intraday volatility and systemic risk, market conditions we used to treat as exceptional have now become normal. However, the legacy operating systems supporting the markets are reaching their technical capacity. Firms are thinking carefully about how they can be better prepared to anticipate future market shocks while keeping themselves afloat: a pursuit in which real-time information, and the functionalities that support it, are key.
But as ever, the road to creating real-time, information-gathering capability isn’t smooth. Real-time post-trade information is within reach, but most of the industry remains unable to access and/or apply the data. Considering volumes are expected to grow, it’s a pertinent time to unpack the very challenges and opportunities that lie directly ahead.
What’s new about real-time?
We often make the case for the importance of data and information to interpret today’s fast and complex market, its vulnerabilities and opportunities. What’s under-emphasized is the importance of real-time post-trade information. After all, the sooner a firm can access information, the sooner any risk can be identified and then managed. Providing real-time post-trade data to gain insights faster, improve reconciliations and controls is therefore imperative.
Ten years ago, access to post-trade data in an instantaneous manner would have been too complex, too expensive, or both. In large part, this was due to a lack of investment in post-trade technologies as well as the use of batch-driven fragmented systems across the trading lifecycle.
Why is real-time information so valuable?
In step with changing tides – integration and consolidation across the technology market, and a definitive boom in data – real-time capability has evolved. Today, it’s a layer that can be applied end-to-end across the derivatives trading lifecycle: from execution and risk management to clearing and settlement. The industry has advanced to a point where the vendor community is creating platforms that facilitate these precise capabilities.
As markets and exchanges evolve to operate 24/7, seen clearly in the case of the cryptocurrency market, significant complexities must be addressed at all hours. Indeed, longer periods of operation may render traditional “end of day reports” obsolete, other than for audit purposes. The need for intraday and real-time reporting becomes more valuable as this evolves and complexities grow.
The tools for implementation
Like any time we adopt innovation from theory to practice, the industry needs to think about creating optimal conditions while ensuring it pre-empts key roadblocks. In order for firms to translate data into actionable insights in near-parallel with the time that data is received, they need technologies with advanced analytical capabilities in place.
Key to this are automated platforms that capture data instantaneously and drive actionable insights across the front, middle, and back office. The best platforms also provide collateral management, supporting the movement of positions or cash. Market participants should look for unified solutions which bring all trading operations into a real-time workflow and provide users with a transparent and uninterrupted view of the market, from front office, to middle, to back.
The demand for these systems exists: one recent research report from Acuiti of sell-side firms found that 97 per cent of respondents believed integrating end-to-end workflow was important to their business. Clearly, the market is waking up to the reality that technology can provide real-time, seamless integration and provide firms with the tools to manage exceptions quickly and easily across any, and all, applications. As we see even higher records of volume and volatility, the shift from our old manual systems to an algo-based, fully automated world is one we should universally embrace.
The necessity of real-time information
For a market focused on security and efficiency, the demand for real-time information is unequivocal; it is key for the successful functioning of trading desks, risk management, middle and back offices. Nevertheless, it’s clear that to succeed, market participants need to choose their systems and software carefully, opting for those that are the most comprehensive and have the scope to continuously evolve.
As the cryptocurrency market has demonstrated, trading 24/7 is possible. There is no doubt that traditional markets will adopt this model over time and require real-time post-trade data to support it. Who knows, it may even be possible to conduct settlement over the weekend in the not-too-distant future. Perhaps we are getting closer to a truly ‘real-time’ environment than we think.
Subscribe to our newsletter