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Automated traders whose strategies depend on speed are turning to
Catch Me if You Can
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Stephane Di Tullio, Barclays Capital:“Some checks … take maybe a millisecond, but any level of complex computation can add a lot of latency.” |
Automated trading systems are hardly a new feature on the futures landscape, but the ever larger daily trade volumes generated in recent years means black box traders are increasingly making their presence felt. Derivatives exchanges have rapidly adapted to the demands of programme driven trading, first through greater volume capacity and faster response times, now also with colocation services and direct market access. Execution brokers and futures clearers too are developing their services and capabilities to handle the higher volumes, more sophisticated strategies and evolving execution trading preferences of automated traders. As well as providing more robust access to a wider range of exchanges, this means adapting risk management and monitoring techniques used to set margins.
Risk management has already changed considerably
to keep pace with the increasing frequency of
automated trading systems, according to Stephane Di
Tullio, Director, E-commerce, Barclays Capital. “Not
so long ago, risk was being managed at T+3, let alone
T+1; now banks are managing risk within a tenth of a
second at worst,” says Di Tullio. “The clearers that
will be successful are those that can manage risk by
the millisecond, because they’re the ones that won’t
have to charge such a premium and will be able to
manage their true risk more efficiently.”The risk management challenge for clearers has
steepened recently as automated traders have
increasingly taken up non-clearing memberships of
exchanges to trade directly. The risk management
filter or layer imposed by clearers on trades passing
through their exchange gateway takes little more
than the blink of an eye to process client transactions
– but it is seen as a sufficient encumbrance by lowlatency
traders to prompt investment in the
technology required for direct connectivity to
exchanges. “Some checks, such as product validation, take maybe a
millisecond, but any level of complex computation can add a lot of
latency,” notes Di Tullio.
According to Thomas Book, Eurex board member with responsibility for clearing and risk management, the shift to direct exchange connectivity is being led by firms – “typically hedge funds” – which employ trading strategies that exploit minimal market inefficiencies and as such are willing to accept the execution risk to cut trading costs to a minimum. “Their trading and/or investment strategies require direct exchange connectivity in order to achieve lowest latency in receiving market data and transmitting orders,” says Book. ...
