Consolidation At The Exchanges
Until recently, traders used to trade equities and options on separate platforms. There were separate traders with separate desks using separate strategies. Increasingly, electronic trading strategies now include both equities and options to offset risk on both sides for more stable hedges. Because of this, we’ve seen electronic exchanges like ARCA and NASDAQ merge their equities and options offerings. BATS is expected to follow suit.
Buy-side clients seem keen to take advantage of this multi-asset offering, because diversifying across liquidity and volatility drives their trading strategies. This requires low-latency, cross-asset awareness that captures the increase in message volumes and aggregates the overall risk exposure to the organization.
Also, with the increasing emergence of new exchanges, MTFs and ECNs around the globe, quoting symbology, for the most part, lacks a cohesive logic from one liquidity destination to the next. With the ability to trade the same stock at multiple exchanges, the lack of a uniform language makes it difficult to map symbols. This can negatively impact the algorithms and strategies of trading organizations.
In Europe, things look set to change. Exchanges such as BATS Europe, Chi-X and NASDAQ OMX are working together to create a uniform symbology across their liquidity destinations. The idea is that creating a uniform code will make smart-order routing more efficient and make consolidated tape offerings more effective. The overall impact would result in better market data and smarter trades, cutting down on systemic risks traditionally caused by bad data in the market.
However, in many cases, many exchanges will hold on to their own distinct symbologies and other exchanges, ECNs and MTFs will still pop up. It is imperative that exchange-agnostic technology be available to support this dynamic environment.
Risk Management: Relationships and Technology
Relationships are still important, but the volatility in the market coupled with the uncertain future of some of the biggest financial institutions, and the recent of scandals that have plagued Wall Street naturally make relationships more risky. Consider KYC (Know Your Client). This is an old school term that just doesn’t cut it for risk managers anymore. As we learned from the Madoff scandal, seemingly strong relationships don’t necessarily translate into sound risk avoidance strategies. While technology is not perfect, it intrinsically lacks self-interest and cannot be influenced by greed. When properly used, it is truly the best tool for managing the chaos and the risks.
It is technology that can scale and adjust to accommodate the multitude of issues and changes that continue to impact the financial markets. It is a consistent and reliable tool but it is imperative that nothing be hard-coded or static. The best tools for consolidating all of these disparities inherent to this business come from agnostic platforms that can integrate with any broker, trading platform or exchange to provide the most comprehensive, real-time and intra-day view. This is essential for controlling risk across an organization, and ultimately, the market as a whole.
A Multitude of Risks – Multiple primes, multiple systems … is integrated technology the only solution?
