Technology and education are key to facilitating the growing use of algorithms in derivatives markets, while improving middle office is a key area for investment for FCMs, according to a 'temperature check' conducted by Fidessa at the FIA’s Futures & Options Expo in Chicago.
Fidessa surveyed attendees at the event, including senior-level executives from brokerage firms, exchanges, trading venues, market makers, clearing houses and intermediaries.
The temperature check asked questions on participant’s use of algorithms in derivatives trading, market drivers for algorithm adoption, and improving efficiencies in post-trade.
Over 70% of respondents believe usage of derivatives algos would increase going forward, with better availability of technology and greater education and familiarity with algos cited as main reasons for this increase.
“As complexity in accessing liquidity outstrips human processing capacity, technology will have to advance in order to give firms the competitive advantage they need,” said Yuriy Shterk, head of derivatives product management for Fidessa in the Americas. “As in the equity markets, derivatives algos are becoming a key differentiator in helping firms compete.”
More than half of respondents said their main reason for using algos was to increase efficiency, while a quarter said they used them to reduce errors by automating workflow
“Algos are crucial to improving workflow: both in minimizing issues and achieving best execution results,” Shterk said. “Both the buy-side and the sell-side are adding them to their armories as derivatives market structure becomes more complex.”
Middle-office/post-trade is the area with greatest need for investment by FCMs, and over 90% of respondents felt that the use of open standards like FIX could help improve efficiencies in post-trade.
“The post-trade lifecycle is ripe for reform,” said Shterk. “The buy-side has already recognized that by repurposing FIX they can deploy a more efficient model for exchanging affirmation and confirmation messages with the sell-side. By following the natural direction of the workflow they can deliver operational efficiencies and increase transparency within the process.”
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