More than two years after the Dodd–Frank Act was passed, it’s surprising how much still remains unsettled with regard to what new regulations may be implemented and how the industry will be transformed. One of the few changes that seems certain is that over-the-counter (OTC) swaps will move to a centrally cleared model.
What remains to be seen is which model for trading and clearing interest rate swaps will ultimately win out. Will these swaps remain custom OTC contracts traded via a swap execution facility (SEF)? Or will the industry move toward an exchange model where swap-like futures are traded on a designated contract market?
Siding with Futures
It seems more and more as if the futures model will ultimately win out. Exchange-traded interest rate swap futures have margin efficiencies that the OTC model can’t match. A number of strategies that make use of OTC swaps today may no longer be profitable once these swap positions are subject to margin requirements, an issue which the substitution of swap futures for OTC contracts substantially alleviates.
The trend toward either the “swaps as futures” or “futures on swaps” model is noted by research firms such as TABB Group, but is also reinforced by moves the exchanges are making. For example, the Chicago Mercantile Exchange (CME) recently announced plans to list deliverable interest rate swap futures, and IntercontinentalExchange (ICE) is transitioning its OTC energy contracts to futures.
Making the Swap: Eris Exchange on TT
For these reasons, I was very excited last month when we announced our plans to provide connectivity to Eris Exchange. Eris has created products that capture the best of both worlds. Eris contracts are futures, which means they bring with them margin requirements substantially lower than comparable OTC contracts—up to 95 percent lower for accounts with highly correlated positions. At the same time, Eris products are designed to replicate the cash flows of OTC swaps while also allowing for custom coupons, effective dates and maturity dates to be specified, giving firms the ability to tailor the contracts precisely to their needs.
In addition to being an effective vehicle for corporations to hedge their business risks, a number of strategies based on Eris futures can be executed using TT’s suite of server-side execution tools, such as the Autospreader® Strategy Engine (Autospreader SE) or the new ADL™ visual programming platform with Algo Strategy Engine (Algo SE). These include:
- Invoice spreads between the cheapest-to-deliver Chicago Board of Trade (CBOT) or NYSE Liffe U.S. treasury future and an Eris contract with a similar maturity
- Swap spreads between an Eris future and a similar-maturity BrokerTec treasury
- Eurodollar basis trades between Eris futures and CME or NYSE Liffe U.S. Eurodollars
- Swap curve strategies between different Eris maturities, between Eris futures and BrokerTec cash treasuries or between Eris futures and CBOT or NYSE Liffe U.S. interest rate futures
We plan to roll out our support for Eris in two phases. The first phase, due out later this year, will add support for Eris’ IMM dated forward starting swaps, including Eris’ invoice spread leg contract. In phase two, we will add support for the rest of the Eris product suite, including spot starting swap futures.
For more information, visit the Eris Exchange page on our website and read the recent news release announcing our plans to connect to Eris.
And if you’ll be attending FIA Expo later this month in Chicago, stop by our booth (#820) on Wednesday, October 31 at 3:30 p.m. to learn more about Eris futures and how you can trade Eris with TT. Free passes to the exhibit hall, compliments of TT, are available here.
Hope to see you at the show!
This post probably isn’t what you think it is. This is not a story about how innovative TT has been over recent years or a recollection of the countless examples of cutting-edge software we’ve been delivering. Yes, we’ve released some great apps over the last half decade, truly innovative ones at that. Since this past Spring alone, we’ve launched our low-latency TT API, staged order functionality, and ADL™, to name a few, and with products like MultiBroker ASP on the horizon, there’s more to come. And we shouldn’t underestimate the tremendous amount of effort and expertise that’s been put toward making our platform the industry’s most stable and reliable—work that is critical but not always obvious.
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Back in 2010, Wired columnist Clive Thompson argued that it’s time for all of us—not just software engineers—to learn how to program software1. It’s been nearly two years since that article was written, but I believe it’s still as relevant today as it was then.
As the product manager responsible for TT’s ADL™ visual programming platform, people often ask me if I think traders can learn to code. I tell them, not only can any trader learn to code, but most traders are already engaged in the mental process of writing a program, whether they know it or not.
As an example, consider a successful point-and-click trader who has a rock-star track record. This trader must know his strategy inside-out and execute it with precision. To be specific, he must have the “pathways” of his strategy mapped out, and, if needed, he should be able to articulate them in an organized and systematic manner.
What makes this trader exceptional, however, is not only the fact that his strategy map depicts the main pathways of logic, but that it also covers the inconspicuous “alleys” or contingencies that can arise in the market. The most successful traders consider the “what ifs” and are prepared with maneuvers to deal with such contingencies.
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By way of introduction, my role at TT has involved me in a number of strategic initiatives including proximity trading, synthetic orders, Financial Information eXchange (FIX) protocol and application programming interfaces (APIs).
Most recently I’ve been holding discussions with a variety of firms to further enhance the capabilities of our system for buy-side traders and portfolio managers. In this role, I’ve had the pleasure of speaking with some key players in the buy-side community.
Of course, the term “buy side” itself refers to a fairly wide swath of business models, ranging from asset managers to hedge funds. But despite the breadth of the buy side as a whole, a growing number of buy-side users is demanding the option of a high-touch capability in a world otherwise driven toward low-latency, low-touch trading.
All the World’s a Stage
Staged Orders in X_TRADER®
Order staging, which involves the creation of staged or “care” orders, is in some ways an idea that’s as old as agency trading itself. Although they weren’t called care orders at first, care orders started as a voice call to a sell-side trader over telephones and squawk boxes. As technology marched forward, the vehicles for submitting care orders evolved to include faxes, followed by emails and instant messages.
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Every time I meet with customers I ask them the same question: “Why do you use X_TRADER?” Some sample responses:
“Because of your spreader.”
“It’s the most reliable system I’ve ever used.”
“Your automated trading is second to none.”
“You do spread charts the right way.”
“It’s flexible. I can configure it the way I like.”
This is a biased sample, of course, since the traders I ask are already using X_TRADER. But the answers are revealing. And there is a strong underlying theme to the replies.They use X_TRADER every day for one simple reason: Because it is very good at what it is supposed to do.
Forgive me if this sounds like boasting, but, hey, I’m just reporting what I hear as the X_TRADER product manager. And after all, this is a TT-sponsored product blog. 🙂
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