The transition of swaps from over-the-counter to, eventually, exchange-traded like instruments holds implications for data management and reporting systems used by banks and proprietary trading firms.
These entities are expanding multi-asset class trading capabilities in the face of shrinking margins from equity trading, while, at the same time, the proliferation of electronic futures, options and FX trading is driving demand for technology to support high-volume data intensive analytics and applications.
“We are seeing a steady movement towards trading multiple asset classes electronically, the most interesting one being FX,” said Simon Garland, senior strategist at Kx Systems, a provider of high-performance database and time series analysis. “This requires that you have the ability to conduct risk management across all asset classes dynamically.”
Kx Systems’ kdb+ database is used to process large amounts of real-time and historical data, and perform complex analytics with minimal latency.
The database gives traders an accurate and instant view of global markets and enables them to rapidly roll out new trading strategies.
In the U.S., real-time public reporting of swap transactions and swap dealer registration began on December 31, 2012, pursuant to the Dodd-Frank Act, which aims to reduce risk and increase transparency in the OTC derivatives markets.
As of last Monday, 65 entities have submitted applications and became provisionally registered as swap dealers. This initial group of entities includes the largest domestic and international financial institutions dealing in swaps with U.S. persons.
Swap dealers have begun reporting interest rate and credit index swap transactions to swap data repositories (SDRs). Designated contract markets (DCMs) that trade swaps also are required to follow these reporting and record-keeping rules. This swap dealer and DCM reporting to SDRs builds upon the reporting by clearing houses, which began October 12.
“Real-time reporting brings transparency to the formerly opaque swaps market,” said Commodity Futures Trading Commission chairman Gary Gensler, in a statement. “The public, for the first time, can see the price and volume of swap transactions, just as it has benefited from transparency for decades in the securities and futures markets.”
The growing volumes of derivatives and trading volumes in FX and equity markets, as well as regulatory requirements, all result in institutions having to store and analyze vast quantities of data.
Under the CFTC’s rules, reporting counterparties must report swap transactions and pricing data to the SDR “as soon as technologically practicable after execution”.
The shortest mandatory time delay will be 15 minutes for swaps executed on an exchange or a swap execution facility.
The optimized code in kdb+ utilizes processor-specific instructions available at run-time, including Intel’s Advanced Vector Extensions (AVX) instructions, available on Intel’s latest generation of Sandy Bridge family of processors.
“We are continually making use of new features in CPUs, particularly AVX,” said Garland. “It’s a vector instruction, meaning that you can perform calculations over arrays of data, instead of one date element at a time.”
The prevalence of high-frequency trading in equities has forced trading firms to expand their capacity for trading multiple asset classes, some of which, like foreign exchange, have lagged equities in terms of electronic trading.
For instance, Chicago-based Sun Trading is expanding its use of the kdb+ database to support growth across its global proprietary trading activities. The firm uses kdb+ database for real-time, high-volume data analysis.