Deutsche Börse’s derivatives arm – Eurex – has put forward a new trading platform that will put the derivatives market on par with futures trading, at least as far as trade speed is concerned. It is hoped that this new platform will attract more high-frequency traders to the market, and it will be based on a system already operated by Deutsche Börse in the US. This follows Deutsche Börse’s planned buyout of Euronext, which was blocked by European regulators.
According to Bloomberg, the move will enhance Deutsche Börse’s ability to compete globally and keep platforms open around the clock as the trading day moves around the globe. With the merger out of the picture, Deutsche Börse is instead focusing on standalone systems around the world so that its traders have access to all markets at all times.
Traders will benefit from the new system in part because it is based on industry standards such as the FIX and FAST protocols. However the new system will, for the most part, be backward compatible with the older system; this should allow a smooth, nearly transparent transition, and leave pending trades unaffected. Jürg Spillmann, Deputy CEO responsible for IT and Operations at Eurex, has said that “with the move to the new system, we again deliver a best-in-class solution to our exchange participants. They will get more choice and greater performance, and the reliability they can expect from Eurex.”
Existing options strategies will be strengthened and choices for the creation of non-standard options strategies will be broadened, hopefully attracting more traders into the market. Also, trading across different options and futures markets will be enhanced, and new order types will be introduced.
The launch of the new system is scheduled for December this year, subject to regulatory approval. If approved, it will be rolled out in phases over a three- to six-month period, allowing participants to migrate to the new product and roll their trades over gradually. The ultra-low latency – the delay between a trade request and its execution – of the new system is considered to be a significant enhancement that should bring new traders over to Deutsche Börse and enhance their market share.
Derivatives are a method of extending credit via the stock exchanges or bourses that include special legal exemptions, but are also much less transparent than other forms of credit. Many people are familiar with derivatives through the futures market; for example, the rice futures market is one of the oldest derivative markets in the world.
The derivatives market moves extremely fast. In this new age of electronic trading, milliseconds can make the difference between a profit and a loss. That, coupled with creditor protections and a lack of transparency, has caused the credit risk in the derivatives market to be underestimated in the past. In fact, the credit crisis that began in 2008 is often partly attributed to using derivatives to hide credit risk from third parties while protecting the parties to the derivatives contract.