High derivatives data traffic plagues market networks

With data traffic rates for November growing by nearly 50% on the previous year and set to grow further during 2003, according to the US data industry body, Financial Information Forum, data vendors are faced with the prospect of expensive network upgrades to cope with current and future data levels during a period of tight spending, with little prospect of financial gain.

"The technical cost of managing and distributing the tremendous amounts of market data being generated… can no longer be taken as a given,” said Richard Gissing, managing director of UK-based market data software vendor Mighter Gissing. “Both the vendors and the market players are undertaking very serious cost/benefit analyses on the distribution of equity derivatives market data to their global client base."

One of the main causes of concern is the burgeoning equity derivatives market, where market makers generate prices to exchanges based on movements in the market, and also on movements in the underlying equities. "Equity derivatives have definitely been one of the main drivers behind the growth in contributed data volumes during 2002," said Gissing.

Industry participants have to accommodate large numbers of derivatives instruments, listed on multiple exchanges. "If Microsoft stock moves, [as many as] 500 options have to update," said Andrew Murphy, a London-based senior consultant at PA Consulting. "It’s a big problem limited to a small number of US equity options exchanges," he said, citing the Chicago Board Options Exchange (CBOE), the Philadelphia Stock Exchange, Amex, the Pacific Exchange and the International Securities Exchange (ISE). Due to the sheer number of option instruments, these five generate half of all data carried by US vendors, he added.

A spokesperson for ISE paints the exchanges as victims of their own success. "We try to be as prudent as possible with our quoting," said an ISE spokesperson. "We would support reforms to address the capacity issues and implement quote mitigation solutions. But information is being generated, the market needs information… and the market always finds a balance sooner or later," the spokesperson said, adding that the exchanges and the Options Price Reporting Association (Opra) have done their part by already expanding capacities in recent years to cope with the derivatives growth.

Also to blame is the decimalisation of the US equity markets. Before the conversion to decimals in 2001, the smallest price change possible was one-sixteenth of a dollar. Now, users are able to trade every cent, which gives more potential equity price changes, and therefore more changes in options prices, said Murphy.

A full version of this story is available at the home page of RiskNews’ sister publication Trading Technology Week.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Chartis RiskTech100® 2024

The latest iteration of the Chartis RiskTech100®, a comprehensive independent study of the world’s major players in risk and compliance technology, is acknowledged as the go-to for clear, accurate analysis of the risk technology marketplace. With its…

T+1: complacency before the storm?

This paper, created by WatersTechnology in association with Gresham Technologies, outlines what the move to T+1 (next-day settlement) of broker/dealer-executed trades in the US and Canadian markets means for buy-side and sell-side firms

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here