Connecting the buyside

In his article for Best Execution, Eric Kolodner, managing director at Tradeweb, explains how connecting derivatives trading technology with buyside systems can reduce risk and streamline the entire trading lifecycle. 

In recent years there has been an evolution in the use of technology throughout the derivatives trading lifecycle. Buyside firms increasingly recognise that technology is a strategic investment which facilitates a more automated workflow and substantially reduces risk. It’s possible to dramatically streamline institutional execution businesses by integrating trading systems with other internal and external systems to reduce operational risk, while facilitating processing and reporting.

In today’s environment, integration connects functions used throughout the trading workflow. To achieve a fully integrated process, buyside firms need to be able to connect internal risk, compliance, accounting, collateral and order management systems (OMS) with external trade execution and processing functions, such as trading venues and clearinghouses.

Developing a truly integrated trading model was a costly proposition just a few years ago. The evolution of electronic trading and the innovation of regulatory compliant solutions have made it possible for more market participants – large and small – to reap the benefits of an integrated approach.

Numerous benefits

These benefits are noteworthy, especially in a leaner financial marketplace. From a risk management perspective, an automated workflow allows effective data monitoring throughout the trade process to limit the risk of failed or ‘out’ trades, while minimising the need for manual processes, thereby mitigating the operational risk of human error.

Integrated connectivity helps reduce costs, by generating significant time efficiencies through reducing the need for manual data processing and expediting back-office reconciliations. It also helps improve capacity, and clients with a variety of needs benefit from integration by being able to execute multi-legged trades or multiple trades simultaneously, and they can submit requests-for-quote (RFQ) to several dealers at once.

Another important benefit for buyside clients is the ability to allocate trades, either pre- or post-execution, and communicate settlement information to dealers, prime brokers, fund administrators and confirmation vendors.

Direct server-to-server connections using industry-standard protocols such as FIX, XML and FpML, as well as proprietary protocols, allow for the automation of post-trade processing.

Connectivity also helps firms in proving best execution by generating audit trails of each auction, and delivering post-trade summary or compliance reports. Buyside investors with integrated systems have access to real-time analytics and transaction cost analysis that can be used to continually monitor performance.