Over the counter (OTC) derivatives are presenting unique
challenges to dealers and technology suppliers, but they are
driving healthy growth in trading technology sales.
Financial analyst TowerGroup predicts that spending by
institutional brokers on derivatives trading technology
applications will rise by a compound annual growth rate of 9.5%
over the next five years, from £481.5m to a total of £684m.
TowerGroup says broker dealers require a trading platform with a
wide range of specialised tools, including risk analysis, decision
making support, trade entry, execution, and operational support to
take advantage.
But there is currently no single system in the OTC derivatives
trading space that provides enough structure and processing
capabilities to be called a single solution for a broker dealer,
said the analyst
TowerGroup says certain "vanilla" OTC derivative products can be
handled effectively as they are.
However, processing hybrid derivatives in a standardised manner
will continue to challenge broker dealers.
"While the reality of OTC trading is more advanced than most
believe, institutional traders confirm that there are significant
areas of inefficiency that dealers need to address," said Stephen
Bruel, an analyst at TowerGroup.
"Due to the fast moving nature of the OTC derivatives
environment, the industry is seeing increased spending on
technology as well as increased pressure on technology firms to
keep up with derivatives innovation," he said.
For firms looking to become major players across all asset
classes in this space, TowerGroup recommends implementing a trading
system incorporating a well-defined strategy including the
following
elements:
*Combining the derivatives trading implementation with a
service-oriented architecture (SOA) framework to aid in the
integration of disparate trading and technology systems.
*Implementing more powerful computational resources.
As OTC products become more complex, risk measurement requires more
computing strength - putting the use of grid computing high on the
solutions list.
*Developing a vendor management system. While trading vendors
tend to partner with intuitions to develop new products and
workflows, institutions need to ask themselves if they want to
participate on the OTC front. If not, they must determine which
vendors have developed modules that represent emerging industry
standards.
*Removing legacy systems that don't support new volumes and
products.
OTC technology growth
Derivatives firms urged to increase system automation