Cash & Liquidity ManagementInvestment & FundingEconomyPricing, Data and Risk Management for Online Trading

Pricing, Data and Risk Management for Online Trading

Everyone trades. It’s a part of the human condition. It’s a fundamental behavioural instinct whether we’re facing aggression, deprivation, inclement weather or even a bountiful harvest. Early economic man bartered. The division of labour in the primitive fields and rice paddies encouraged more efficient exchanges of goods. The introduction of currencies and coinage, representation and managed financial systems some six thousand years ago brought logic and control to the trading environment.

The Internet Transforms Trading

No longer content with the open outcry markets and trading pits, no longer satisfied with trading via the telephone, relaying orders, positions, stop outs and limit levels through others, the modern man and woman connects directly, instantly and in real-time. It’s fast. It reduces errors. The transparency, if it is allowed, is very encouraging for the private client, the trader and the corporate treasurer.

But change demands acceptance on many levels. Change challenges preconceived and firmly established manners and protocols, both of which acquire the trappings of the sacrosanct.

Ironically, it’s often the administrative acceptance, the corporate ‘think time’ that impedes the introduction of new approaches to trading. Corporate acceptance is typically retarded by competing interpretations of what the changes might mean. Different departments with their own ingrained functions and legacy systems and procedures look at Internet trading and new systems as a fundamental casus belli to the workings of the greater good. And this is not a surprise. In fact, it’s as predictable as the advent of the efficiency of the Internet itself.

What Difference Does the Internet Make?

Eight years ago, I worked in one of the elite broker firms in the US. We were lectured regularly by the IT gurus from our own corporate HQ and from the fabled consultancies around the world regarding the outlook for the Internet. They would tell us what we should expect. One of the best descriptions then was captured in the phrase, ‘the three Rs’:

Replication. The idea here was that we could take what we did manually, or through the telephone, and replicate it on the Internet. We could build websites with content that existed elsewhere. We could establish procedures that mirrored the offline procedures.

Replacement. If we were successful, we could use the Internet to substitute for activities that were taking place offline. This, for the management perspective, was heralded as the great achievement as we would clearly reduce expenditure.

Reengineering. The sine qua non of the deal was that the Internet would enable us to re-invent the way we did business. At the time, in the WTC back in 1998 or 1999, we nodded our heads and agreed that things would be very interesting if, in fact, such achievement were possible.

The Reinvention of the Industry

We are all participants. Even those with minimal technical skill or contribution are part of the change. Nothing is familiar. If you had managed to take a seven-year sabbatical and were just returning, you’d be more than surprised. Trading is automated. Data interfaces flow freely. Efficiencies have replaced personalities and habits.

Product inventory and access is perhaps the most striking feature in the market today. Managing the availability of scarce resources is always the oligarch’s weapon of business. The marketplace today has little patience for this traditional tool of the large banking and trading organizations. The great equalizer is the real-time data interface. Banks in Russia, China, Portugal, India and Europe are accessing inventory with equal ease and speed. Of course there are relationships that determine the connections, the access capability and the pricing, but these determinants, important as they are today, are being driven toward a lower and lower threshold by the demands of the marketplace.

A recent visit to one of our bank’s client in Eastern Europe highlighted this point. We were in the trading room of the brokerage firm, and the discussion focused on the firm’s demand for index derivatives from an east Asia exchange. The challenge for our bank was the speed and pricing we could offer them. It was not a question of whether or not we could bring up this exchange, rather how quickly we could accomplish the task. I would also mention that this was not unexpected, in fact, this particular firm has been one of our most forward-looking partners. To consider this request a decade ago would have been the material of science fiction, but now there are few inhibitions, few hurdles that can’t be leaped when it comes to accessing product.

In a matter of a few business days, Saxo Bank had the Singapore Derivative Index fully operational on the trading platform. Trading on these contracts was immediately engaged by the Polish traders.

In Hong Kong, one of the leading Chinese brokerage firms is converting its business model from a traditional broker-based, commission-based structure to online, electronic trading. Is this a radical shift? Perhaps, but given the near-100 per cent acceptance of the mobile phone in this developed city-state and the ubiquitous data delivery personal digital assistants (PDAs) in everyone’s hand, it’s hard to imagine that a face-to-face, or voice-to-voice order and execution process could endure.

However, to underscore the dimension of the change, I would recount while walking through the trading floor, in late April, I saw among the many seats in the trading room, at least six or eight older Chinese women sitting at screens, operating their computers.

“Hiring the elderly for the new sales force?”

“Not at all,” replied my host, “these are the traditional traders, you know. We would have them in here, trading next to our traders, but that’s all going away now. Everyone will be connected from their computers at home, at work. And the crosses will be right there, on their computers. They’ll be trading even better. They might not know it yet, but it’s where we’re going to be, and fast too!”

Pricing, Information and Risk Management

Pricing. The trading engagement has progressed and come full circle. Early man traded food for weapons, fire for protection, etc. Early man could see these objects and experience their benefit. Similarly today when clients look at the spreads on Internet pricing platforms, they expect to trade on that price – and they do.

Information. Real-time, quality content makes trading precise. Good information is the co-pilot of every good trader. Imagine trading without knowledge of the economic calendar, without insight into the trends and patterns in the various instruments and markets you cover and trade. This is, of course, impossible. That is why a commitment to delivering information on the same platform is important.

Risk Management. The efficiency of online trading is derived from the timeliness of information. Immediate trade confirmation, instant recalculation of margin positions, of available equity for trading, of the trader’s profit and loss – these are the essential elements in the platform. Integrating the front end with the middle end and back end of the system means that all activity is immediately captured and displayed accurately.

Real-time and transparent data flows drive business to those platforms that offer it freely and efficiently. From Poland to China, from Portugal to Austria, traders are moving online, accessing the world’s markets instantly and with confidence that they’re seeing competitive prices and real-time data. And this is already yesterday’s news. What happens tomorrow will be even more powerful: more markets opening up, more traders, more instruments, more price compression and better tools.

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