Low Latency, Equity Options & Risk Management
Posted by Jeff Wells on Tue, Oct 11, 2011
With volatility and data rates so high and a derivative trading scandal rearing its ugly head again, it is not surprising that there is renewed activity in the field of risk management and technology. Data rates are hitting 5 million messages per second several times a week and they even topped 6 million messages per second on 12th September and on 7th October. Most of these messages come from the derivatives markets. Just checking www.marketdatapeaks.com today I can see that OPRA hit 2.85 million messages per second at 1:15 pm, and as far as I can see there is nothing special about today, by recent standards at least. These kind of data rates are obviously a cause for concern when your systems are trying to keep up with evaluations, proprietary & customer positions as well as theoretical pricing. Below is a screen shot of the 7th October, the day that Fitch downgraded Spain and Italy by a couple of notches.
A few weeks ago, on 13th September I attended the Inside Market Data Conference in Chicago and realtime risk management was prominent on the agenda. The last panel of the day discussed the topic. The subject fascinated me and brought back memories from my trading days- I remember the first day at Scandinavian Bank in 1988 when a compliance manager was employed in the trading room. He sat next to me! All the other traders were suspicious and didn’t even bother to disguise their contempt for my new friend Alistair. His risk reports were delivered to him on a massive print-out in the afternoon the day after all the positions were taken! In the meantime, the markets chopped and changed and all the traders reacted accordingly. The poor risk manager didn’t stand a chance. The option trader who sat on my other flank, used to make up delta numbers for the options revaluations. He said, confidently, that he could guess the correct numbers off the top of his head because of his experience. How far we have come since then!
So it was not without interest at IMD Chicago that I heard senior risk managers from Bluefin Trading and FT Options discuss whether to place risk managers inside trading groups, or outside. Another point they discussed was the desire for risk managers to have alternative systems to carry out evaluations, systems that are not shared by the traders who might well be tweaking Greeks for various effects in the complex book. Things haven’t changed so much then!
The conversation also gave me a new appreciation for the VoleraFEED available from Hanweck Associates (http://www.hanweckassoc.com/) and currently in development at Exegy. Options traders and firms increasingly demand an outside system to furnish theoretical prices and Greeks so that they can double-check their own numbers and data. The world moves so fast and the positions are so complex, this kind of feed is a must-have. In addition, OPRA has suggested that they might well come out with a feed along these lines. OPRA is calling it the OPRA Implied Volatility & Greeks Feed. If they can tune it to the needs of the market and deliver it economically, it could become a market standard. However, it is not easy making such a feed since many practitioners have very specific preferences as to algorithms and they are often quite particular about inputs for dividends, historic volatilities and interest rates. Nevertheless, if you are interested in taking such a feed from OPRA, you should not hesitate to check out their survey and give them feedback https://www.surveymonkey.com/s/OPRAIVandGreeksfeed
And if you need to simply be able to handle all the data on one server from the OPRA feed, please feel free to contact Exegy to find out about the Exegy Ticker Plant as a dedicated appliance http://www.exegy.com/. It is also possible to get OPRA data via the Exegy Data Tone. A single connection at $5000 per month might well deliver all you need.