By Mark Woolfenden, managing director of FOW TRADEdata
The choice of and the investment in trading solutions for both the buy side and sell side of the derivatives industry is an important determinant in the degree to which competition exists in brokerage and other trading related services. Well managed instrument symbology enables sell side firms to offer trading, risk management, clearing and settlement services to the buy side, irrespective of the product choice that a buy side client has made. The innovation of commercial services for symbol mapping has enabled sell side firms to gain competitive advantage to win new business that may have otherwise been inaccessible to them, to reduce internal costs and to comply with vendor data licensing conditions. For buy side firms, the choice of sell side services has increased as a direct result of consistent symbology mapping of otherwise unique vendor identifiers.
The Industry Problem with Symbology
Symbol management of financial instruments is not a new subject yet it has never been more exposed in the press and media as pivotal to regulatory compliance, Many firms still carry out vendor instrument mapping internally within so-called black operations, potentially breaching vendor data licensing restrictions unwillingly, but out of necessity. This has been driven by the lack of truly global identifiers that would be acceptable in commercial, regulatory and operational terms. Embedded trading solutions and invested operations technology mean that developments toward a common standard are more likely, under free market forces, to be incremental than those mandated by unilateral industry change.
Sell side services that require translation of incoming client positions need to validate the price executed through the client trading platform, either using the buy side’s original trading product symbols or by using an alternative sell side source(s) or both. Carrying incorrect symbology can lead to trade mismatches and mispricing of open positions with inherent asset risk, compliance risk, settlement exposure and reputational impact. Where a sell side firm does not carry a vendor’s instrument symbols, the buy side faces reduced competitive offerings to only those sell side providers who can support that buy side’s choice of vendor product.
In cases where official industry identifiers are not available many firms generate their own internal version of a constructed symbol in order to complete the trade order process leading to unique instances of what should be common symbology. Without regular database auditing against subsequent official identifier allocations, firms become increasingly burdened by manual intervention to resolve incorrect contract mappings in risk management or compliance reporting functions in other parts of the firm.
Problems can also arise in the timeliness of available symbols for new contract listings as vendors and other industry bodies can take different approaches as to when new symbols are allocated. Forward dated contracts may carry a pre-allocated symbol or the symbol may be dynamically allocated once the contract is openly tradable or has been traded for the first time, although industry investment means that is now easier to allocate and publish new symbols more effectively.
The Xymbology Service
The Xymbology service is offered by FOW TRADEdata, an independent provider of quality reference data for exchange-traded futures and options. The Xymbology database carries over 15 distinct symbologies in a collaborative approach with market data and independent software vendors, regulatory and other industry bodies and offers a whole universe of tradable contracts against which participants’ symbols are cross-referenced. The clean order match of a traded series product to the correct listed instrument can fundamentally underpin a superior position management environment.
Enriched data feeds allow the import of portfolio transactions from client originated platforms to be instantly mapped into clearing and settlement systems, all referencing the correct exchange traded instrument. Open positions can then be dynamically tracked for clients by utilising the same or alternative vendor equivalent traded series symbology to retrieve real-time prices from market data sources and client reports enriched with additional attribute information.
The strength of the Xymbology service is that FOW TRADEdata’s independent and neutral industry status encourages multi-vendor participation in this niche area to provide effective solutions to mutual clients’ needs.
The existence of robust symbology maintenance to allow trade data to be passed between mixed vendor products is an essential component in the complex and component based architecture of modern trading operations. In this respect Xymbology is a game changer that has altered competition dynamics in both the sell side and buy side in the listed futures and options market.
For the buy side the selection of trading products is no longer limited to those products that sell side brokers could readily support due to cross-referencing gaps in unique vendor instrument symbols. Limited choice in broker services has been replaced by increased service offerings from more brokers that can translate incoming identifiers from buy side firms. This opens up the prospect of increased broker service choice for the buy side, new accessible business for the sell side and for trading product providers, the real prospect of switch sales from incumbents.
New client on-boarding times can be reduced and thereafter, persistent quality of service for clients is underpinned by effective operational processes based on robust instrument mapping across all vendor and proprietary components used. In addition the application of cross-vendor symbology mapping improves middle office risk management and for the back office increases efficiency in straight through processing in clearing and settlement.
The innovation of Xymbology as a commercially available instrument cross-reference database of key vendor participants in the futures and options space has brought significant benefits to the industry. Since its introduction the service has resulted in an increase in both choice and competition in services offered to the buy side community and has enabled sell side firms to improve the quality of service to their clients through an unrestricted choice of vendor platform.
Brokerage service firms can offer seamless implementation of new clients, with invested operations of differing configured technologies for market data and order execution. This capability can provide a competitive advantage in winning new business, more often than not in a switch sale, with minimum disruption and high quality of service.
With risk management and regulatory compliance reporting at the top of many senior managers’ agendas, good symbology can also reduce risk and help avoid large fines from lodging of incorrect transaction records.
The uneven playing field caused by unique symbology has been levelled to a more open environment, where future product choice can be made on best functional merit as the focus of competition and not symbology. The Xymbology service:
• Allows product choices for end-users to be open and not restricted by legacy
• Enables product switching to be justified and more easily implemented
• Adds competitive edge to the sell side who can win new business by operating a vendor neutral environment
• Compels vendors to win business on product merit in a more competitive environment
• Delivers sell side improvements to operational efficiency and reduces processing costs
• Raises quality of service offerings and wider choice for the buy side
• Allows ready price retrieval from alternative market data vendors increasing competition
• Assists the industry to achieve lower exception reporting and improved risk management.