The expanding role of listed derivatives in institutional investor trading strategies has placed significant pressure on financial institutions to automate their post-trade processes. These rising volumes and processing complexity are forcing firms to address inefficiencies in their existing manual processes. According to new TABB Group research published today, “Processing Complexity: Back Office Challenges of Listed Derivatives,” written by Andy Nybo, a principal and head of derivatives research, increasing use of derivatives in trading strategies will create greater complexity across front- and back-office processes.
The cost of managing this increasing complexity through manual processes is no longer sustainable, Nybo says, explaining that as portfolio strategies move beyond traditional equity and fixed-income investments into derivatives instruments, internal processes across the front and back office need to be revamped. “The increased sophistication of investment portfolios is creating an entirely new set of challenges that begin to manifest themselves when volumes rise and manual post-trade processes simply cannot keep up with trading desk’s demands.”
According to TABB, the listed-derivatives markets are one of the few bright spots in the global financial markets at a time when regulatory pressures are forcing trading away from over-the-counter (OTC) protocols. Exchange-traded derivatives (ETD) volumes are growing around the world, with trading of exchange-traded futures and options contracts growing at a compound annual growth rate (CAGR) of 21% since 2003.
“Sell-side firms are realigning their business models, turning to technology as an enabler for more efficient operations, better customer service and ultimately support increased revenues, investing $1.2 billion to support post-trade processes for ETDs in 2012,” says Nybo, adding that buy-side firms are investing an additional $383 million in post-trade processing technologies for their internal initiatives.
No matter which side of the trade you examine, Nybo explains, the complexity of execution strategies affected through electronic trading tools is generating a new set of challenges. “As more firms use automated strategies to trade derivatives and more trades are executed through algorithms, clearing brokers specializing in high-frequency trading services, for example, will feel the pressure. Even though these firms may go home flat overnight, an inability to manage trading activity throughout the day can significantly impact real-time margin and risk calculations, especially in times of elevated volatility.”
The 22-page report with 12 exhibits is available for download by TABB Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.
Executive Summary: Processing Complexity:Back Office Challenges of Listed Derivatives