and Electronic Trading
is transforming the way that financial products are being traded. Traditional
over-the-counter markets can now be presented electronically to anyone,
anywhere, at any time. With opportunity through technology, there comes
the challenge to structure the electronic market in a way suitable for
each product and participant.
Electronic markets in the world of equities have existed in certain forms
for many years, limited to the "club" of exchange members. The
internet has brought access to the market to the wider public. The fixed
income markets, however, still are predominantly telephone-based. Market
makers advertise proposed buy and sell prices through brokers and salesmen
or in response to individual quotes from other traders and clients. Some
electronic offering pages have arisen, but generally these are "subject"
prices: the deal still needs to be agreed over the telephone. Both parties
then capture the trade details, feed it to their settlement systems, which
then both instruct their respective clearing agencies to move the securities
Now the future of fixed income and derivative trading will be e-markets.
Market makers and other market participants can advertise proposed buy
and sell prices and sizes (an "offer") through an e-market.
Another market participant likes the price and "hits" the offer.
The e-market then sends an execution notification to the two participants.
Some participants will manually have to re-enter the trade into their
own processing system to capture the position, profit and loss, and effect
settlement. Participants with more sophisticated technology will be able
to process the trade straight through their systems on the basis of the
Luddites will claim that e-markets are insufficiently discriminating.
For many products beyond simple bond trading, complex legal agreements
are required before a market player can consider trading. It's no good
showing a repo trader a bid for a piece of collateral if that trader does
not have a signed repo agreement with the bidder.
Such complexities on the legal side lead many large financial houses to
construct bespoke offering systems on their corporate websites. Then they
can restrict access to the site to only their customers with whom relevant
legal agreements are in place.
Such corporate website bolt-ons have their place, and provide a cozy mini-market
for trading with a large financial entity, but ultimately they are very
limiting. They're more of a flashy shop window than a proper market with
multiple participants on each side.
Visionaries quickly realise that technology can crack the legal agreement
stumbling block quite easily. Central counterparties do the best job.
For these, market participants put forward some capital towards a central
counterparty. The central counterparty novates all transactions done with
other market players and nets settlements. The result is less strain on
the balance sheet, fewer settlements, fewer fails and lower costs, and
generally a wider market for each participant. But central counterparties
are not the only answer. Technology is sufficiently advanced to "filter"
the market information for each participant according to his legal agreements.
This is not rocket science by any means.
Assuming the liquidity in the electronic market grows sufficiently, everyone
benefits. Everyone will be able to show the market offers and bids, see
where the market is trading and see their own trading desires fulfilled.
Compared to the usual ring-around on the phone lines to price a trade
now, it's nirvana.
But the hype and excitement of e-opportunities cannot subjugate another
primary goal of many market players: to reduce processing and settlement
costs by promoting "Straight Through Processing" (STP). This
concept means that you should expect a trade entered into a front-end
system to flow automatically into a back office system and achieve settlement
without any further intervention.
In itself that is a noble aim. But the proponents of STP often start too
far down the track - they advocate post-trade STP, as opposed to
pre-trade STP. What this means is that many financial systems proclaim
their ability to achieve STP once a trade has been done and entered into
the front-end. Meanwhile many electronic markets make a virtue of how
easy it is to use their own market display technology to manage orders
and see executions. But neither group talks much about STP from the order
- namely taking a trader's desire to trade, in the form of an order, and
once that trade is executed seeing it flow automatically through front-
and back-office systems to settlement.
What is needed are front-end trading systems that can show a trader his
positions, allow him to manage his risk and see all his trading activity,
but also allow him to place orders on exchanges directly from those positions
and activity. Once an order has been hit, the trader needs to be able
to see the effect of that hit on his position and see the process through
to the back office. Few systems being on the market today combine these
two "hot topics" of finance - e-ability and STP.
The logical place to start is with the trading platform. Unless it has
the infrastructure for built in interfaces to the electronic markets and
effective order management, the move towards electronic trading can be
Anvil is at the leading edge in the development of trading systems. Our
platforms are well positioned to fit with the e-market model and are ready
for the e-market place. Anvil have always looked at the trends in the
financial markets and what direction they are taking. These are reflected
in our trading systems.
ARTS, which is the most popular third-party repo system and Denarius,
the new cross trading system, both have the capabilities for trading on
electronic markets and achieving straight through processing. Both systems
allow the trader to
Register an offer or order on one or more exchanges
Manage those orders and offers from a central order manager
See the effects of such potential trades on his positions
Convert the orders into trades automatically when hit on the exchange
Suspend orders on other exchanges automatically when a trade is done,
Book the trade through to a back-office system for settlement
We believe such core, leading-edge functionality will be essential for
efficient e-market trading in years to come. But it's available now, from
As e-markets proliferate, they will gradually conquer all of the current
telephone markets. Make sure your technology is up to it!