BT Radianz is set to focus on the derivatives market more this year than ever before.
Over the past six months, the connectivity provider has entered into partnerships with the likes of ASX, CME and the Moscow Exchange, increasing its presence in the rapidly evolving market where technology investments have become more important than ever.
Squeezed volumes, regulatory demands and the increasing focus on risk and compliance have ensured that participants are equipping themselves with the most up-to-date technology.
But a series of glitches during the first quarter of 2013 is raising questions surrounding the risks of technology failures in the derivatives market.
BT Radianz’s, head of industry initiatives, global banking and financial markets, Chris Pickles, talks to FOWi’s Jonathan Watkins about the far-reaching impact of technology glitches, spotting the cracks before the breaks and how the industry can avoid these costly outages.
FOWi: The CBOE glitch last week followed a string of similar occurrences across exchanges around the world, is it fair to say that the risks are increasing as technology becomes more advanced?
CP: Clearly as technology is being used more and more at the stressed end of the market - HFT, high-speed trading, low latency for example - then the dependency of technology makes it even tougher when things go wrong.
The days when you could have a system which could stop for a minute, and then people could pick and up carry on are gone.
The idea today that everyone gets it at the same time within a microsecond makes it far more stressed in that way because when things stop it’s the impact it has on the broader market.
You have got the different levels of impact. When it is one individual firm that goes down it has an impact on its internal operation and also on everyone else that it is dealing with at the time.
But when you get a get a core infrastructure in a financial market stopping then the feedback ripples right through the world.
I think some of these problems results from the fact that things aren’t moving so fast in terms of technology, the economic pressure on
|"When you get a get a core infrastructure in a financial market stopping then the feedback ripples right through the world"|
The result of regulatory pressure as well, because of capital adequacy requirements where more money is being taken out of the company so they can’t invest in technology.
When you take those things together it starts to show the cracks.
FOWi: With the amount of regulatory compliance required is it more important than ever for companies to invest in the best technology?
Regulations are addressing issues of business continuity along with many other things, but the topics all come under the heading of operation risk.
In the old days nobody particularly paid attention to technology as it was all too technical, now it has been built into regulations - Basel II has had it in for over ten years, Mifid has had it since 2007.
So you start to look at it and think if regulators have to write regulations to do it then yes, it is important.
"When you look at economic crashes and banking failures, it is the wakeup call that there is much more here that needs to be paid attention to"
Typically what happens is the regulation comes in, that says you have to have systems that continue to work even when the outside world has a problem. In other worlds ‘my computer broke down is not a sufficient excuse.
Everybody at this point will say to themselves that everything is ok, but when you get the extra pressure, higher volumes in the market, fewer people, less money, less time to test, then that is where the problems show.
Hopefully they will see this before they get the break and see that requirements are not being met and they will pay more attention to the reliability and security of the systems, while also having an alternate plan just in case.
FOWi: How can you see these cracks before the break - is it a case of more testing before going live or better safeguarding once it is being used?
Things are getting more complex so it is harder to test things because you are dealing with much more complex scenarios and instruments.
There is a tendency in financial services to think ‘surely everything will be ok’.
If you talk to people who work in the post-trade sector, then they will say that the failure rate of transactions is 2% or more.
About 2% of trades don’t actually go through fully automatically and they require manual intervention to sort out problems.
There’s a different rate of quality in other industries than currently we are seeing in financial services
|"Exchanges today see that technology is one of their differentiators"|
When you look at economic crashes and banking failures it is the wakeup call that there is much more here that needs to be paid attention to.
Rather than thinking ‘all will be well’ it is probably better to say ‘surely we need to do even more testing’.
FOWi: So are investments in technology a way to get ahead of the competition in this current environment?
Exchanges today see that technology is one of their differentiators, even more so when they are actively competing with each other.
Technology is great stuff but you can end up with it running away with you.
Trading platforms which are competing with each other find technology critical.
But it’s not just about the speed, having speed is important but just having that and not the reliability and the safeguards that are needed becomes meaningless.
You start to look at the outside world and this is why people are outsourcing, because of the expertise, the cost and cost efficiency.
FOWi: Major exchanges surely have sufficient backup systems in place, so why do problems continue to occur?
Exchanges have got backup plans, systems and date centres available to them, but it is when it comes to using it that matters.
|"Hiccups and glitches are not once in a blue moon now, they are periodic each year"|
It is literally having somewhere where you can try things out and test them far away from your facility, make sure everything works and then go live, but that requires resources.
Hiccups and glitches are not once in a blue moon now, they are periodic each year, not just in exchanges but banks as well.
When we are looking at the world of financial markets it is a world of communication, the foundation on which everything is built. It is how the members access the exchange, how the members reach the regulator, how the regulator looks at what’s happening in the market and how you get your market data.
Not only does your company work 24/7, your systems have to work 24/7 as well.
It is where expertise stands out.
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