Whether you are trading Eurodollars in Chicago, FTSE 100 futures in London or Nikkei contracts in Tokyo, there is little to distinguish the style of listed futures and options trading or the regulatory requirements involved. From the trader’s perspective, the hundreds of thousands of instruments and the multitude of exchanges on which they trade are all part of a large but essentially homogenous international marketplace. As a result, it is a market on which the sun never sets. When the day’s business finishes in London, traders want to be able to seamlessly hand over client orders to their colleagues in New York or Chicago without losing their place in the queue.
Technology is the means by which this huge, sprawling market can be shrunk down to manageable proportions: a global order book that gives tier one futures and options traders the worldwide visibility they need on a single platform with a seamless international transfer of workflow and a focused view.
This is the challenge. It means that the largest futures and options players who typically participate in this market have to maintain connections to 50 or so global exchanges on an integrated low-latency solution at the same time they are providing the full range of workflows that clients demand.
As with equities before them, traders of futures are finding that a flexible approach is needed so the right balance of latency, risk checking, throughput and functionality can be achieved. A number of venues are doing whatever they can to attract high frequency traders to win the low-latency game. Standard FIX APIs, co-location, exchange-level risk checks and sponsored access are all available and being promoted heavily to attract liquidity.
On the other hand, there remains a relatively high proportion of futures and options instruments that are fairly illiquid and synthetic combinations that are difficult to execute and require a more high-touch approach. Architecture that is optimised for low- latency workflow and low-touch trading, also has to provide services to those clients who want managed care orders as well as DMA, algos (benchmark or execution) and auto-spreading functionality. The systems have to cater to firms that simply want a screen or those that want to send FIX message flow as well as buy-sides that want their broker to manage their considerable flow on a 24-hour basis.
The difficult choice facing the larger firms is either to build their own systems in-house or to cobble together a solution from multiple third-party vendors. Both tend to be very expensive, inflexible and sub-optimal. Working with disparate EMS, OMS, risk management and mid-office systems presents serious integration risks and hinders the ability to create a fully functioning, stable, centrally controlled global order book.
However, there is now a third alternative, which is to leverage the experience and technology gained through the automation of the global equities market and apply it to the creation of a single trading platform for futures and options. In effect this means deploying sophisticated global order management systems with seamless throughput from FIX allocations to mid-office functions on the futures and options desk. Centralising activity through a single platform creates a very powerful tool. It allows traders to share visibility and management across the regions and it facilitates the centralization of key functions such as global risk, compliance, mid-office tasks and allocations for greater effectiveness.
There is an interesting comparison to be drawn with order management systems in global equities trading. Dealing with complex synthetic strategies and the dizzying array of instruments that typify the futures and options space is more complex than managing simple equity (or equity-like) assets – but the workflow is typically much more straightforward in futures and options because in almost all cases besides US equity options, there is a unique and mostly liquid place to trade each product. For equities it is the complexity around fragmented markets that has elevated the sophistication of order management systems. But, for listed futures and options it is the global scale of the markets and the fact that the contracts are part of a largely global marketplace that demands effective order management behind the basic market gateways. In many respects the equities markets have led the way in the evolution of systems whether that be through the early widespread adoption of FIX, full automation of the middle office, the advancement of algorithmic, basket and SOR trading or the pressing latency demands in the HFT space. All these challenges have been overcome and the technology is now becoming available to the futures and options markets. The landscape of futures and options is changing. The impact of Dodd-Frank on this space is yet unclear but readiness for a complex and fragmented OTC market and the inevitable collision course with the listed space will be interesting to track.
How ready is your system for the changes ahead?