Thought Leadership

Next Generation Cross-Asset Trading Systems

Cross asset trading systems have become the securities markets' Holy Grail. Pontus Eriksson, Product Manager, SunGard Front Arena outlines what functionality these systems should include and how they can become the foundation of traders' future plans.

The demand for cross-asset trading systems is constantly increasing as investment banks continue to abandon their trading desk silos in favour of cross-asset derivatives platforms that cover all range of instruments and markets. However, we are still in the fledgling days and not everyone is clear as to how these systems should be built and what they should be able to provide.

A true cross-asset trading system should first of all be able to cater for the two essential trading categories - over-the-counter (OTC) and exchange traded products - both as separate products and also in combination for those trading strategies that involve a mix of OTC and exchange-based trading.

There is also the issue of multi-asset class trading - where a system can cover every major asset class to a great depth and combine these in a single portfolio. Finally there are the cross-asset class products, or hybrid products which are made up of two or more single asset class instruments which are packaged together as a single product.

Meeting future demands:

To satisfy the demands of a trading strategy that traverses different asset classes or includes complex, hybrid portfolios involving multiple asset classes, a system's flexibility will be stretched to the limit. And with the rate of growth in trading volume and complexity, the need for scalability and extensibility will be immense.

But it is possible to take this need too far. Some systems are simply too extensible where the 'toolkit' architecture leaves the customer to program the system every time they wish to add a new currency or a new instrument. The bespoke nature of the development also means that no two installations will be the same making it harder for both the vendor and the customer to maintain the system or easily introduce any upgrades.

At the other extreme is the closed system solution where a customer will pay a fee and get a black box in return. It may be incredibly adept at carrying out its tasks but it becomes nigh impossible to amend or enhance your trading strategy in any way. Customers become totally reliant on their vendors and these inflexible solutions can quickly be rendered obsolete by the pace of technology change and in this age of transparency, the appetite for such opaque products is rapidly diminishing.

Where customer demand continues to grow is for a system that can provide both considerable extensibility and flexibility but in a controlled way. The key is to recognise that these two features are not mutually exclusive and there need not be a trade-off.

A system can be an out-of-the-box product that is also extensible. For example, it may have a limited number of entry points where the system can be opened up and customers can add new features supplied by the vendor. These features can include proprietary valuations and financial calculations; customised reporting; configured workflow and additional data. This capability enables the customer to have several bespoke elements, but the vendor is aware at all times of the changes made to the system so is able to maintain it and supply upgrades rather than becoming more excluded from the product each time new functionality is added by the customer.

Providing depth and breadth:

One of the biggest challenges in developing cross-asset trading systems lies in creating a product that is both deep and broad in terms of coverage but does not sacrifice anything in terms of performance or extensibility. The breadth of coverage lies in the creation of a system that can cover all of the instruments and asset classes contained within a customers' trading strategy in a flexible and consistent format. But this will be redundant unless there is a depth of functionality and performance that can be applied to each and every asset class.

This is why it is important to retain some of the functionality and principles that underpin the best single asset class systems currently available. Banks do not want to get involved in some sort of trade-off where they exchange the high performance and functionality of each separate system for an aggregated platform that loses something in performance.

The term 'performance' covers many areas, some of which should be more clearly defined. Firstly there is the recalculation speed - when there is an update in the market, the trader's yield curve, price tick and risk calculations need to reflect these changes in real-time. In order to achieve these real-time recalculations, the system needs to have a robust infrastructure.

There is also batch performance - the responsiveness of the system when you start it up at the beginning of each day or if you run a particularly large report. And there is the issue of memory consumption. Even when using a 64-bit architecture there are still limits to the amount of memory that can be used.

In the context of a cross-asset trading system, it is also important to note what 'performance' means for each separate asset class and the ability to execute trades because there is often a big difference between cash or exchange-based transactions and OTC transactions.

In exchange-traded equities, the emphasis is on the speed of execution and low latency, particularly where algorithmic trading is employed. Additionally, in the cash FX market it is about volume and processing as many trades per second as possible during the peaks of daily traffic. On the other hand, for the OTC derivatives market, the average daily volume may be far less than equities and FX but there is a far greater computational complexity that requires solid and reliable performance. A system that can cater to both calculations of equity basket derivatives over a GRID of processors to deliver prices to exchanges whilst also consolidating all positions in one application addresses both needs.

The future:

The idea of creating a system with a consistent, extensible and flexible cross-asset trading platform that matches any single best-of-breed solution in terms of performance and functionality may sound 'too good to be true' but this is not to say it is an unattainable ambition for vendors.

In their favour is the fact that banks want them to succeed. All banks are trying desperately to reduce their IT costs, leading them to reduce the number of systems they use and to introduce some consolidation to their trading platforms - something that is exacerbated with the continued consolidation between major banks. But they do not want to do this at the expense of any functionality or performance. The cross-asset trading system of the future must have no weaknesses. Once you can demonstrate that a cross-asset trading system has as much functionality, reliability, asset coverage and performance as all of the individual systems used, then the decision for the bank should be obvious.

Vendors are not quite at this point yet. Cross-asset trading systems do exist of course but they are not of the seamless infrastructure and consistent performance that is required. These systems are still in their early stages and have not yet reached their maturity, not least because the concepts that led to their development - cross-asset trading strategies and a consolidated approach to IT - have only existed for so long. But the demand is clearly there and with the derivatives market showing no sign of slowing down it is a demand that will not fade away.

For the vendor that can be the first to meet this demand with a truly cross-asset trading system with depth, breadth, extensibility, scalability, straight-through-processing and great performance, the rewards will be plentiful. At SunGard we believe we are in a great position to do so. Front Arena is the only STP trading system that can boast full asset coverage of OTC products as well as high performance exchange trading and high volume FX trading in a single, enterprise-ready infrastructure. And we strongly believe that consolidated cross-asset trading systems will make their standalone counterparts obsolete.