A solid trading platform underpins a successful warrants & certificates business

Many continental European banks are now building their own warrants & certificates business and others are in the planning stages. Key to achieving success with warrants & certificates however, is getting the trading technology platform right.

Orc Software is the proven solutions provider for helping many banks in Europe and Asia Pacific build a successful warrants & certificates business. Orc’s projects have ranged from banks launching a few hundred products on one trading platform to launching several thousand products on multiple trading platforms, with the added capability for new product launches on an ongoing basis. Covered trading platforms in Europe include SWX, SEDEX, Xetra Frankfurt, Xetra Vienna, OETOB Warrants, Cats, Euwax (T.I.Q.S), vwd Tradelink (Quotrix), RSP, Saxess, Euronext, Budapest Stock Exchange, Warsaw Stock Exchange and Prague Stock Exchange. In the Asia Pacific region these are Hong Kong Exchange (HKEX), Korean Stock Exchange (KSE), Taiwan Securities (TSEC) and Australian Stock Exchange (ASX). In addition, Orc can facilitate internal matching to avoid matching own issued products on an external platform with additional in-house order-flow. Products varying in complexity need to be considered, from plain vanilla warrants to highly structured products that may contain basket options, fixed income legs and are denominated multiple currencies.

From a technology point of view warrants & certificates is a flow-oriented business. Products are sold on various platforms and, once sold, the trading desk needs to do corresponding hedges and trades, which need to be published in real-time to downstream risk- and settlement systems. As this may involve several thousand products of derivate nature, that might be based on fast moving underlying instruments, the technology needs to be capable of calculating and distributing thousands, or even tens of thousands, of updates per second to the connected trading platforms.

This is quite a complex task that not only requires fast and efficient calculations. Each exchange platform has its own protocol, its own tic rules (that implies that calculated quotes need an appropriate rounding/tic rule adaptation on a per platform basis) and of course limitations in bandwidth and throughput. They therefore require not just solid, low latency, high-throughput platforms but also in-depth knowledge about each exchange and its properties. In addition, the quoting/contribution process needs to be capable of controlling and managing multiple platforms; be able to provide protection against unwanted arbitrage (by for example disabling quoting or widening the spreads in an automated and configurable way); manage volume re-fills in case a quote is hit, and disable quoting in case a product is sold out or a knock-out level is reached.

There is increasing demand from business users to provide customized logic that is not limited by setting parameters and configuring templates within a graphical user interface. Also, most high volume operations today want complete control over such logic and demand by using a high-level business adapted language (the Orc platform offers its own custom language BLL or Java) that is compiled with native machine code to meet the very high performance standards in this business.

The right technology platform for warrants & certificates not only covers connectivity to the various platforms, with highly advanced contribution and trading capabilities, but importantly also generates theoretical prices for the products issued and supplies the risk and volatility management capabilities. The issuers of warrants & certificates need to launch new products on a continuous basis in order to meet market demand for new products.

It is unlikely that the issuer will find a system on the market that will cover all product requirements and therefore an appropriate system needs to contain financial engineering capabilities in addition to offering a wide range of pre-defined templates for plain vanilla products. Such financial engineering capabilities should also offer possibilities to interface with external pricing libraries and systems. In this way, existing financial models of the issuer can also be used transparently on the trading platform. It is important that risk and volatility management capabilities that are geared towards the needs of the trader are covered (as opposed to systems that are built primarily to cover documentary/reporting needs). This means that the trader is supported with appropriate volatility models that can be parameterized to reflect the needs of the business. On the risk side, the trader receives the information he needs to hedge his products in real-time, and baskets / complex structures can be broken up in their residual components for hedging. Running capabilities for stress tests, what-if scenarios, etc., should also be included.

In the past quite a few issuers have made large investments only to achieve mixed results with building in-house systems. Maintenance costs tend to be very high and banks are forced to keep rather large development teams for the sole purpose of maintaining such systems. Why build to achieve less functionality when you can buy a leading system such that Orc Software provides with all the proven and fully supported trading capabilities you require?

Critically time to market for connectivity to new markets and ECNs (-1-), or modelling of new financial products, can be long and costly and result in lost opportunities. Successful issuer’s invest in best of breed standardized systems that cover the technology and maintenance requirements so that banks can focus on the important business of revenue generating activities such as launching innovative products and listing / trading these on multiple platforms.

Notes:
(1) In Continental Europe opportunities for connecting to new markets are being offered by the new economies of Central and Eastern Europe and in addition quite a few technology changes for the established platforms in Western Europe have just been done or are in planning.