Robust Data Signal More Automation Opportunities

By Gregory Van Droogenbroeck, Head of Enterprise Reference Data; Dominick D’Angelo, Enterprise Data Product Manager, Listed Derivatives; and Gadi Goldress, Exchange Business and Product Development Manager, Bloomberg

The listed derivatives markets continue to expand, with a growing number of contracts listing on exchanges around the world. For futures and options markets participants, this means significantly more data to manage.

Research analysts, portfolio managers (PMs), market makers and risk managers have access to an increasing amount of data previously used as an enterprise workflow solution that many now value for investment research, idea generation and risk management.

Vendors and data providers have responded by offering their clients more comprehensive derivatives data aggregated and normalised across multiple exchanges globally. Many of these data feeds are now considered foundational for trading and risk management. Receiving standardised representations of derivatives data listed around the world lets traders and portfolio managers automate certain front-office processes, and therefore focus on their clients, uncover trading opportunities and manage risk more effectively.

Aggregating the right data

There are many exchanges globally that list contracts on various underlying asset classes, including single-name equities, equity indices, rates, commodities, currencies and fixed income instruments, among others. As market participants increasingly look to leverage this data, they need management platforms, infrastructure and systems that help with analysis, automation and conformity, as well as on-demand and comprehensive coverage. 

More front-office market participants are leveraging quantitative analysis and automation. To support their activity within the listed derivatives space, vendors must aggregate the right data in ways that enable these market makers, traders, PMs, risk managers and research analysts to receive and view the data from each of the relevant exchange feeds. They want a normalised representation across millions of contracts that are listed and available to trade across multiple global exchanges.

Market participants need the ability to take these data feeds and quickly view any relevant contract for their individual strategies and seamlessly compare them in order to make trading, investment, hedging and risk-management decisions. By ingesting and storing the data in a central common database for their firm, the same data can be used across different systems and departments, thereby maximising efficiencies and maintaining consistency and alignment across workflows.

In addition, these same market participants look to leverage different dimensions of quality data to make investment and hedging decisions. Market participants need the data to be a true representation of the underlying production data as received from the exchanges. This increases interoperability, making it easier for back-office systems to connect directly to exchanges.

To ensure data conformity and accuracy, the largest vendors can:

* Transform and translate data feeds (relaying, say, a put or call order from a US options consolidator or a European venue in the same schema and format across exchanges, even when each represents the data differently)

* Compare multiple streams of data to see if any are missing; maintaining multiple circuits and points of failure helps recover any missing data points immediately

Firms also want timely, on-demand, coverage across products for a breadth of exchanges. For example, large data providers such as Bloomberg cover around 150 derivative exchanges. Clients are now able to obtain the underlying contract data before markets open through pre-market data feeds. This allows them to identify opportunities to provide liquidity to clients or proactively identify trading opportunities for a specific product and set up the contracts in their systems before the market opens.

Finally, market participants need their data to be complete and comprehensive enough to ensure they have sufficient underlying data to cover each of the existing contracts for their multiple use cases. This requires timely access to pricing, reference, descriptive, risk and underlying data on all active exchanges globally, as well as complementary data sets that allows market participants to implement proactive risk-management measures using implied volatility and risk sensitivities, among others.

Why data quality matters

High-quality data is crucial for decision making and accurate risk management, as well as for automating back, middle and front-office workflows.

Market makers can rely on these data feeds to cover all products where they provide liquidity to their customers and more easily price and manage risk across the full spectrum of exchanges, contracts and products. They need their data to provide a record of every contract available to make markets for their customers.

Separately, asset managers need complete, high-quality data that is easily discoverable on contracts to find trading opportunities, represent a trading strategy or hedge existing exposure. Analysts and PMs can use ongoing and historical data to identify trends in the market, develop a pricing model, back test a trading strategy and position themselves to capitalise on mispricing or arbitrage opportunities.

Data access and the migration to SOFR

As markets change and new asset classes emerge, participants will make new markets that others will look to track. In light of this, the transition from the London Interbank Offered Rate (Libor) to other risk-free rates, such as the Secured Overnight Financing Rate (SOFR), makes the case for access to comprehensive and complete datasets more apparent. Many cash bonds will be issued on the back of these new risk-free rates, including SOFR.

Consequently, the futures market has adopted SOFR-based derivatives to let clients hedge their exposure or take positions that represent a trading view or strategy. In May 2018 the global futures market listed roughly 25 contracts that allowed traders to take a position or hedge an exposure to SOFR; two years later, the number of listed futures contracts has quadrupled. With the demand for SOFR futures, came the launch of options contracts on these futures with over 3,000 listings as of May 13.

As the market moves toward futures contracts referencing alternative risk-free rates such as SOFR, market participants will look to data vendors to aggregate, normalise and push these new listings and instruments directly from the many global exchanges to firms’ data feeds, thereby saving customers valuable time and effort.

Aggregating the many facets of data quality on a single feed better prepares market participants to navigate unexpected outcomes. This is critical in any market, especially those that experience large and unprecedented moves, such as negative interest rates and, more recently, crude oil futures pricing.

When it comes to listed derivatives trading, market participants have high expectations for their data. Sophisticated investors, sell-side market makers and corporations looking to hedge their exposure all depend on seamless, timely and cost-effective execution and liquidity. Therefore, complete, high-quality, aggregated, normalised and timely data are critical for futures and options markets participants to make markets, generate returns or hedge their exposure.