Derivatives firms ‘need more automation’ to cope with trade volumes

The continual rise in trading volumes is forcing derivatives trade firms to look at better automation, according to research.

The businesses need to automate more of their post-trade processes, suggested a report from TABB Group.

The ‘Processing complexity: Back office challenges of listed derivatives’ report, states that the increased use of derivatives in trading strategies is creating greater complexity in the front and back office.

Derivatives volumes have expanded at a 21 percent compound annual growth rate since 2003, the report states, prompted by the extensive regulation around over-the-counter protocols.

Andy Nybo, head of derivatives research at TABB Group, said the cost of managing this increasing complexity through manual processes was “no longer sustainable”.

“The increased sophistication of investment portfolios is creating an entirely new set of challenges that begin to manifest themselves when volumes rise and manual post-trade processes simply cannot keep up with trading desks’ demands.”

Nybo added that “sell-side firms are realigning their business models, turning to technology as an enabler for more efficient operations, better customer service and ultimately to support increased revenues”. This year, businesses will invest $1.2 billion globally to support post-trade processes for derivatives, he said.

The complexity of execution strategies is also generating a new set of challenges. “As more firms use automated strategies to trade derivatives and more trades are executed through algorithms, clearing brokers specialising in high-frequency trading services, for example, will feel the pressure," he said.

“Even though these firms may go home flat overnight, an inability to manage trading activity throughout the day can significantly impact real-time margin and risk calculations, especially in times of elevated volatility.”