Futures exchanges reported record volumes in 2022 on heightened volatility, rising interest rates and geopolitical shocks like the invasion of Ukraine. For example, 2022 was the best year in CME Group’s history, as average daily volume rose 19% year over year to a record 23.3 million contracts. Additionally, Cboe Global Markets reported record net turnover in 2022, which the exchange group said was due to its derivatives complex.
At the same time, financial firms remain under pressure to do more with less and are increasingly adopting a multi-asset trading approach. This underscores the need for continuous innovation to help the buy-side achieve better fills amid these increased volumes and assortments.
Daniel Noorian, Liquidnet
Daniel Noorian, Liquidnet’s Head of Listed Derivatives Sales, said: “People weren’t expecting the explosion in volume that we’ve seen over the past two years. Increased volumes not only put the execution desks under pressure, but also create strains within operations as firms offset increased derivatives volumes.”
Exchanges have also introduced new contracts, including derivatives on risk-free interest rates, such as B. SOFR to help the industry transition from Libor, environmental or cryptocurrency contracts. Additionally, to attract retail investors, exchanges have introduced micro contracts, which are much smaller than standard-size contracts. This also contributed to increasing volumes.
“Exchanges are definitely innovating, but the problem for futures commission merchants (FCMs) is keeping up with what they’re doing and deciding what’s going to be relevant to their clients,” Noorian added.
Over the past five to ten years, banks have had to invest heavily to meet a variety of new regulations. In Europe, for example, the implementation of MiFID II required FCMs to overhaul elements of their execution platforms and internal clearing systems to ensure they could meet their regulatory requirements.
Noorian said, “I think that’s one of the reasons why recent innovation in the execution of listed derivatives has been slower than in other markets.”
The futures markets were among the first to embrace innovation, as they were among the first to adopt electronic trading, according to Noorian. For example, the trading floor of the London International Financial Futures and Options Exchange (LIFFE) closed in 1999 as execution increasingly took place on screens. The financial industry then focused on other more profitable areas as players invested in the electronization of other asset classes, including equities and, increasingly, fixed income.
Noorian acknowledged that there have been some developments in futures execution tools, but most of that has been limited to banks and providers developing smarter algorithms that have improved significantly over the past five years.
“However, by themselves, these algorithms haven’t really helped the buy-side decide how to execute on a given day under certain market conditions,” Noorian added. “If the buy-side were equipped with a broader toolkit, it would be easier for desks to manage more diverse flows in markets that are experiencing increased volatility in liquidity states. Pre-trade intelligence would also help them meet increased regulatory scrutiny around best execution – where, for example, similar orders were executed differently on different occasions.”
One solution to help the buy-side formulate execution strategies, according to Liquidnet, is to provide real-time pre-trade assessments of market conditions in an easily accessible format. Noorian explained that independent metrics can help the buy-side make more informed decisions about how or whether to fill an order.
“The metrics could contain derived data that contain useful indicators of market conditions,” Noorian added. The information should be clear, concise and easy to understand, which would be similar to what Liquidnet has done in the cash stock space.”
In 2022, Liquidnet integrated the company’s proprietary trading analytics into its stock trading application. Liquidnet Investment Analytics gives stock traders more access to personalized pre-trade and intra-trade analysis through real-time alerts and visualizations without leaving the Liquidnet stock application.
The integration allowed Liquidnet to address the challenge of using data to make high touch flow more efficient. In equities, the buy-side has automated the majority of easy-to-execute trades to allow high-touch traders to add value by focusing on the more difficult or larger trades, and Noorian said the same trend is happening in listed derivatives watch is . The use of Algo Wheels to trade listed derivatives below a certain value has proliferated, while the pandemic has also highlighted the importance of high touch in difficult market conditions.
Noorian added, “Liquidnet has a long history of developing novel execution tools in collaboration with its members. There is an opportunity to bring that experience to listed derivatives.”
SUBSCRIBE TO NEWSLETTER
And get exclusive articles on securities markets
Comments are closed.