The Inbox

NYSE Spends Three Asian Exchanges Choose $600 Million on Technology Deals OMX as Technology Supplier NYSE Euronext, seeking to build its technology capacities, is spend - OMX, the Scandinavian market operator that is being acquired by ing $600 million on the acquisitions of two technology companies. and Borse Dubai, announced agreements to provide technology On Jan. 14, the exchange announced an agreement to buy Wombat to three Asian exchanges—the Tokyo Commodity Exchange, the Financial Software, a U.S.-based firm that provides high performance mar - Singapore Commodity Exchange, and the Bombay . ket data solutions. Wombat’s software is geared for trading firms that need to In the case of Tocom, OMX will deliver integrated trading and clear - process huge volumes of market data at high-speed, and is used by firms such ing systems to the Japanese exchange, with NTT Data, the exchange’s as Bear Stearns, EdgeTrade, Merrill Lynch, Susquehanna, and TD Securities. traditional technology supplier, acting as systems integrator and operator. NYSE Euronext said the acquisition would broaden its connectivity, The new system, OMX’s first in Japan, is scheduled to be operational by transaction and data management solutions, such as hosting co-location March 2009. Masaaki Nangaku, Tocom’s chairman and chief executive, for high-speed trading, providing direct market access connectivity and said the new platform would help the exchange offer faster and more algorithmic execution, and creating new data products such as inte - efficient trading services to its customers and “improve our position in grated and consolidated price feeds. NYSE Euronext will pay $200 mil - the global commodity marketplace.” lion in cash for the company, which will be integrated with the In the case of Sicom, OMX will deliver an integrated trading and TransactTools subsidiary that the exchange bought at the end of 2006. clearing system for the exchange’s commodity futures products, princi - “Wombat is a technology innovator and world leader in market data pally futures on rubber. Under the terms of the contract, OMX will be management solutions, and we welcome the addition of the company’s the system provider for both the implementation and support of the new entrepreneurial management team and employees to NYSE Euronext,” system, which is scheduled to be operational by September 2008. Sicom Duncan Niederauer, the exchange’s chief executive officer, said in a added that the new system will allow market participants to access the statement. “Wombat bridges our commercial technology and market exchange through their own order management systems or the data strategies, broadening our customer reach and enabling NYSE exchange’s web-based trading solution. Lim How Teck, Sicom’s chair - Euronext to deliver advanced technology solutions to our customers’ man, said the new system “will appeal to a wider market segment, who increasing data management challenges.” are keen to capitalize on the recent boom in commodity prices.” On Dec. 12, NYSE Euronext announced an agreement to re-inte - Lastly, OMX will deliver trading and clearing systems to strengthen grate its European software provider, AtosEuronext Market Solutions, by BSE’s derivatives and securities trading capabilities. The Indian buying out its partner, Atos Origin, for 275 million euros ($400 million). exchange said it is targeting mid-2008 for the rollout of the new systems. The deal will give the exchange full control over the technologies The exchange put particular emphasis on the importance of the clearing underlying the NSC cash trading and Liffe Connect derivatives trading system, saying this will allow BSE to clear a wider range of products, as platforms. NYSE Euronext will also regain ownership of AEMS’s tech - well as offer a new set of clearing services to its members. nology business with third-party exchanges such as BM&F, Bovespa, “Needless to say we are very excited about delivering technology to , Tokyo Financial Exchange, and Toronto Stock one of the largest and most active stock exchanges in India,” said Exchange, which according to analysts generates revenues of approxi - Magnus Böcker, OMX’s chief executive officer. “Through transforming mately $100 million per year. NYSE Euronext said it expects the “re- its trading and clearing infrastructure, BSE will be able meet the escalat - integration” to be completed by August 2008. In another aspect of the ing volume capacity needs of the marketplace, putting them in a prime deal, Atos Origin will acquire the third-party clearing and settlement position for further growth.” business and capital markets business from AEMS. “In-sourcing our technology gives us greater flexibility and a compet - itive advantage in a fast-moving exchange landscape where technology is key,” Jean-François Théodore, deputy chief executive officer of NYSE Euronext, said in a statement. “Bringing the expertise of a large number of highly skilled IT personnel back in-house will enable us to better deliver on our commitments to provide our customers with more effi - cient trading services and to deliver IT synergies to our shareholders. We will also be able to continue our strategy of selling our state-of-the-art trading platforms to more exchanges around the world.”

38 Futures Industry UBS Expands Options Trading Capabilities with Algo Tools Goldman Sachs Launches UBS is ramping up its electronic execution capabilities with Two More Algorithms for U.S. Options improved access to U.S. listed options markets as well as algorithmic Goldman Sachs Electronic Trading has introduced two algorithmic trading strategies. In mid-December, the investment bank launched four trading strategies designed specifically for the U.S. listed options markets automated strategies for trading listed options: 1) options delta adjust, to capitalize on growing interest in the trading of options. which enables a trader to peg an order’s limit price to a specific delta; 2) “Over the past years—and particularly in the volatile market envi - options TWAP, which intelligently spreads slices of an order across a ronment of the past few months—we’ve seen an increase in clients’ specific time period, with the ability to peg to delta; 3) options trigger, incorporation of options into their overall trading strategy,” JP Xenakis, which operates with a price-conditional model related to the underlying head of electronic listed options sales at Goldman Sachs, said in a press stock; and 4) options scale trigger, which uses parameters for a price release. “The suite of algorithms and tools that we offer aids clients in range and employs interpolation for more aggressive orders. finding optimal liquidity and the best prices.” “Our clients want sophisticated tools that give them the ability to The “iceberg” strategy, one of the two new algorithms, works by place options orders that are responsive to market conditions,” said John posting small orders into the various markets with the balance held in DiBacco, head of U.S. equity derivatives trading. “We started with the reserve until the posted orders are executed. Rather than having a stan - foundation, building intelligent order types within our DMA offering, dard size for the incremental orders, the algorithm “dynamically opti - and making our robust options smart order router available through mizes the price and the size of the various orders, keeping in sync with third-party partners. Algorithms are the natural next step in the evolu - every tick in the markets,” Goldman Sachs said. tion of this market.” The “delta adjusted” strategy is designed to float at a limit with the To reach a wider swathe of the market, UBS is making these algo - underlying security according to the options delta. The order will be rithms available through a number of third-party providers of order man - temporarily paused if the price moves outside the upper and lower agement systems and execution management systems as well as its own bounds set on the underlier, keeping the delta relevant. Additionally, execution system. UBS said clients can use the options algorithms this order will scan all the options markets until the order is marketable within the third-party systems running on their desktops, with UBS’s and then sweep liquidity accordingly. smart routing software handing the transmission of the order to the exchange. UBS said it is working on additional algorithms that will handle Lehman Rolls Out larger blocks, manage market impact, vary aggression, and hedge equity Algorithm for U.S. Listed Options exposure. “As overall options volumes, particularly electronic trading Lehman Brothers has added an options algorithm to its electronic volumes, continue their exponential growth, we will see an explosion of execution toolkit. The investment bank announced in late November very interesting and innovative technology,” Dibacco said. “It’s an excit - the launch of “options work and pounce,” an order execution strategy for ing time to be in the options markets.” the U.S. listed options market. The algorithm manages orders anony - The launch of the algorithmic trading tools came not long after UBS mously on behalf of clients and opportunistically reacts to available liq - rolled out direct market access for options trading with 14 providers of uidity, Lehman explained, allowing clients to build or reduce positions order management systems and execution management systems. The while minimizing market impact. DMA service, which is based on the FIX protocol, allows customers “Options trading continues to migrate to electronic venues,” Frank using those providers to select UBS to route their orders to the options Troise, head of U.S. equities electronic trading products, said in a press exchanges. The 14 providers are: Advent’s Moxy, BNY ConvergEx’s Eze release. “Delivery of algorithmic tools that access electronic options liq - Castle Software, Charles River Development, Fidessa, FlexTrade, uidity is in direct response to growing client demand for advanced deriv - Inforeach, ITG Macgregor XIPTM, Linedata, Neovest, Portware, atives trading capabilities.” Reuters Trading for Exchanges, Tethys Technologies, Townsend Analytics’ RealTick, and TradingScreen.

January/February 2008 39 The Inbox continued

CBOE Creates Electronic Trading Platform for Flex Options ISE Says New Co-Location Service Cuts Network The Chicago Board Options Exchange, seeking to attract more Transit Time to Less Than 200 Microseconds options trading from the over-the-counter market, launched an elec - The International Securities Exchange, the U.S. options exchange tronic system on Nov. 20 for trading index and equity flex options. Flex owned by Deutsche Börse, has launched a co-location service that pro - options are designed to allow customers to customize contract terms vides low-latency connectivity to ISE’s options and stock exchanges. ISE including strike prices, exercise styles, and expiration dates of up to 10 said the service will allow member firms to obtain network transit times years from the trade date. CBOE said the new system, CFlex, offers a of less than 200 microseconds by placing their trading hardware in the “substantial improvement in operational efficiency” over OTC trading same building as ISE’s data center. The service will be offered in con - by dramatically reducing the time required to execute a flex options junction with Quality Technology Services, the facilities management trade and making the process far less complex. CFlex offers complete firm at ISE’s data center. anonymity, with a combination of orders and request for quotes, and guaranteed participation rights and order books; thereby enabling bro - kers, liquidity providers, and their customers to negotiate trades securely over the Internet. The system is built on technology provided by Cinnober Financial Technology.

Liffe Sets Second Quarter Date for Broadband Access and Co-Location Launch Liffe announced on Dec. 18 that it is now targeting the beginning of the second quarter for the launch of two new access services that will Markit Targets Post-Trade significantly reduce the amount of time necessary to transmit orders to Processing of OTC Derivatives the exchange and increase the amount of market data available to Markit, a U.K.-based provider of data and valuation services, has traders in real-time. The services, which originally were expected in the agreed to acquire SwapsWire, the electronic trade confirmation network first quarter, consist of a new 100 Mbps broadband access service that for the OTC derivatives markets, the two companies announced on promises a dramatic increase in capacity over the existing T-1 and E-1 Dec. 4. SwapsWire, which is owned by a consortium of 21 derivatives connections, and a new co-location service that will allow high-fre - dealers, enables market participants to confirm OTC derivatives trades quency traders to place their servers in a facility in close proximity to immediately upon execution. Markit said it plans to combine the the Liffe matching engine. Liffe said the new broadband service will give SwapsWire confirmation capabilities with its trade processing workflow users access to much richer market data, with no compression. It also platform, and noted that the increasing number of outstanding confir - will provide access to NYSE Arca Options, opening a new way for mations in the OTC derivatives markets demonstrated the need for European trading firms to access the U.S. options market. The exchange greater automation to reduce operational risk. U.S. and U.K. regulators cited strong interest in the new services, with over 84 orders for the new have issued a number of warnings in recent years about deficiencies in 100 Mbps broadband access service and over 22 orders for co-location as the infrastructure of the OTC derivatives markets. In particular, they of January. The exchange added that seven application service providers have warned that post-trade processing has failed to keep up with the will offer high-speed access to Liffe over the new 100 Mbps lines: rise in trading volumes and the continued development of new and Bloomberg Tradebook, CQG, Fidessa, Ffastfill, GL Trade, RTS, and increasingly complex products. They have urged participants in these Trading Technologies. markets to adopt more efficient processing methods to reduce the back - log in trades pending confirmation.

40 Futures Industry