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Thursday, June 12, 2008

Not Trading but Pricing

Posted by Richard Bentley

(with apologies to Stevie Smith)

Wednesday's announcement at the SIFMA conference of our collaboration with Sun Microsystems highlighted two aspects of our joint endeavor; our support for the Sun Solaris 10 platform on x64 and SPARC in the latest Apama 4.0 release and the development of a new Accelerator in the area of real-time pricing. The latter is a very interesting application of CEP technologies which I want to highlight further.

If there was still a need to justify a broader remit for CEP in Capital Markets beyond Algorithmic Trading, the area of real-time pricing fits the bill nicely. It bears all the hallmarks of an ideal CEP use case: an over-arching need to respond in real-time to high-volumes of streaming events from a variety of sources. Real-time response is critical, as a bad price being shown to the market, even for a few seconds, can result in huge exposure for the price maker as clients gleefully hit the price as fast as they can punch the keys - or more likely nowadays, as algo engines react to the sudden opportunity.

Over the last few years we have deployed the Apama platform in support of real-time pricing use cases in many clients across several asset classes. However, besides the real-time imperative, other commonalities from these use cases exist:

  • a multitude of (real-time) inputs: prices are derived as a function of multiple sources, for example real-time price of underlying (derivatives) or related instruments, market volatility, direction and size of deals by "indicative" clients, sector indices, news headlines and more;
  • a desire for price differentiation: the ability to make prices specific to individual clients, or "tiers" of clients, based on client relationships, agreed deal sizes, previous and desired success at winning client business (the "hit rate") etc;
  • risk management: real-time tracking of the current position or inventory accumulated through dealing on the published prices; the greater the inventory, the higher the potential exposure - so make prices to drive client trade flows in a certain direction to reduce the magnitude of the inventory and therefore the risk.

Of course, the Banks don't stream prices to their clients out of charity - clients pay a premium to deal on instuments they would otherwise need their own direct market connections, memberships and trading software to access. In addition, some Banks - the "Market Makers" - are contractually obliged to provide liquidity through streaming prices for specific instruments to electronic markets (before you start to fret, they get well-rewarded for this seeming altruism). Market Makers are usually contractually obliged to provide prices, within certain spreads, for an agreed number of hours of the trading day; monitoring adherence to ensure a Bank is fulfilling its market making obligations is yet another facet of the real-time pricing space where CEP can - and does - play a part.


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