Trading Price Validation
Addressing the risk of contributing bad prices from automated systems
The risk
Pain points
Financial institutions are contributing millions of prices
across thousands of instruments every day using a
variety of automated price generation engines. These
prices are also used by automated trading engines to
trade large volumes across multiple asset classes. Many
factors affect the quality of the generated prices and the
risk of anomalous prices being quoted to markets or
clients is real.
The contributor of poor prices is exposed to the risk of
costly trades. Losses may be significant in addition to the
reputational damage that results from the distribution of
poor, out of market prices – but could be avoided through
price validation.
In a typical trading environment, market prices are fed to
the pricing applications from multiple sources via a
market data distribution system. Priced flow to the
trading applications usually via a low latency middleware
bus or potentially multiple buses for different
applications.
Clients
Equities
Execution Venues
Fixed
Derivs
Income
3
4
Trading & Execution Platforms
Market Making
Execution Mgmt Internalisation
Price
Distribution
Order Mgmt
Algos
2
Low-latency message bus
Direct Feeds
Aggregated
Data Feeds
FX
Trade Processing
1
Market Data
5
Pricing Engines
Clearing &
Settlement/Post-trade
Other Data
Feeds
CCPs
Internal apps
External services/venues
Key monitoring points
Common issues
Many things can and do go wrong and incorrect prices
can be used by trading applications or published to the
market. Delayed incoming market data, high data
volumes affecting system or network performance and
physical faults are among common factors impacting
pricing systems.
Market
prices
Composite
prices
Client
prices
Once published to the execution venues, prices become
potential targets for HFTs and other market participants
that will exploit any significant deviations. Therefore
each price should be checked and validated as it is
published to ensure that it is within agreed parameters,
such as:
 Alignment with current market rate
 Delta to previous prices based on standard deviation,
absolute or relative difference, etc. (intra-day
configurable options)
 Client skew within tolerance
 Deviation from average contributed price
 Custom calculations provided by a quant team (e.g.
in the form of C++ or Java libraries)
Delta Capita has extensive domain experience of advising, consulting, designing and delivering front
office systems. Drawing on that experience, we have worked with best-of-breed solution providers to
develop a real-time price validation solution that is unique to the market.
How Delta Capita can
helpand Technology Consulting
Our approach
Business
We assist clients in selecting and implementing an
appropriate price validation mechanism, which can be
used across any asset classes. The nature of the
validation depends on the latency requirements of the
trading strategies.
Every price is evaluated using solutions that act at the
microsecond latency level. Where ultra low latency is
not required, the validation can be implemented as a
“speed bump”, stopping the flow while the validation
takes place and guaranteeing price quality within the
parameters set.
The solutions can extend beyond price validation to the
entire trading data flow, from incoming market data to
trade processing. This offers a new level business
visibility to senior decision makers.
Delta Capita has extensive domain experience of
delivering Front Office and metrics capture solutions.
We have invested in intellectual property and
partnering to accelerate the delivery of a
comprehensive price validation solution.
We
recommend tools that have the best fit with each
client’s unique requirements.
We start with advisory to agree and document the
business drivers and requirements, ideally beyond the
core price validation objective. This provides the basis
for defining the appropriate operating model, solution
architecture and business case. We always ensure
that we make maximum use of any relevant existing
tools that can be part of the solution.
The solution delivery often starts with a pilot
implementation for one specific use case, covering a
core set of requirements that demonstrate the
functionality and latency impact. When these have
been proven, the main implementation can begin.
The effectiveness of the price validation solution
increases as its scope expands. Incoming market data
and all components (software and hardware) along the
trading flow should be covered. Each user audience
has different requirements and they can be all
addressed, reusing the data and providing it in the
right context and on the right level of detail.
A staged approach can be used to extend the solution
to cover all asset classes where price contribution is
complex or susceptible to anomalies.
Delta Capita can accelerate the time to delivery of a project to minimise the risk of contributing bad prices. We
partner with vendors who provide solutions that can be configured to solve the price validation problem. We provide
both the business and technology expertise to create an optimal solution.
Head office:
9 Devonshire Square
London
EC2M 4YF
Benelux office:
Bijlmerdreef 101
1102BP Amsterdam
Netherlands
+44 (0)203 714 1870
+31 (0)20 233 9314
www.deltacapita.com
[email protected]
Asia office:
12 Marina Boulevard
#17-01, Marina Bay Financial
Centre
Tower 3
Singapore, 018982
+65 6809 5113
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Please contact: Peter Kendall
Associate Partner, Head of FI and Rates Delivery
[email protected]