Time May Be Running Out For Single Asset Trading Platforms

Terry Flanagan

The interconnectedness of financial markets is propelling a move away from single asset trading platforms.

In the futures industry, for example, traders need to understand the trends in price movements in underlying financial instruments.

Traders, thus, need the ability to trade what they want to trade on one consolidated platform providing full transparency.

“If I have a successful strategy trading on the E-mini S&P futures, the value of having the ability to port that strategy to trade in the ETF market is huge,” said Jamie Oschefski, director of U.S. sales at trading system provider Cyborg Trading. “This is another way for these firms to spread their risk and is certainly a paradigm shift.”

After attending the recent Futures Industry Association event in Chicago, Oschefski quickly realized the importance of having multi-asset technology. “You can see the scramble from the single asset platforms to beef up their marketing or buy some cheap automation tool to white label with their platform for a unique value add,” he said.

In the over-the-counter derivatives world, the need to compute credit valuation adjustment, or CVA, across baskets of instrument such as interest rate, FX and currency swaps is driving demand for cross-asset analytics.

With increased regulatory pressure on financial institutions to manage counterparty credit risk, robust real-time risk analytics for CVA is now a necessity.

Although real-time risk analytics for CVA is not required under current regulations, upcoming Basel III requirements will require that banks calculate CVA and hold capital against this measure.

CVA is typically defined as the difference between the value of a derivative, assuming the counterparty is default-risk free, and the value reflecting default risk of the counterparty.

“The importance of financial and risk management capabilities in portfolio level analytics has never been greater, especially when considering the impact of collateral optimization on CVA, dynamic hedging techniques and managing the regulatory cost of capital,” said Steven O’Hanlon, president and chief operating officer of analytics provider Numerix.

Numerix’s flagship product, CrossAsset, accelerates the computation of exposures, CVA and PFE (potential future exposure) for large portfolios of interest rate swaps, FX forwards and cross-currency swaps by aggregating cash flows to represent the portfolio as a ‘super swap’.

Cyborg Trading’s flagship product, Cloud Trader, enables the rapid development of low-latency algorithms, and automates entire strategies or portfolios across all asset classes, the company said.

Having multiple platforms trading different assets in a firm makes it extremely difficult to manage real-time risk, said Oschefski.

“The CTAs and futures commission merchants I spoke with at the FIA [event] are in the market for a futures platform they can use that has FX and equities capabilities, not only for hedging but also for alpha generation,” said Oschefski.

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