optech04

Issue #44

Last Update March 2, 2006

Financial OpTech 2004 by David Katz At the Futures Industry Association's OpTech 2004, held in New York this month, operations people and others involved in the day to day support of commodities trading got a chance to hear, from commodity exchange executives, government regulators, senior brokerage house executives and support vendors just what is likely to be in store for them over the coming year. Three major topics accounted for most of the conference time: increased competition, new products, and the impact of technology.

Increased competition for investment dollars and trading volume impacts both the exchanges and the brokerage community. With more exchanges, here and abroad, able to trade similar financial instruments and commodities, investors are able to choose where, when and with whom to trade with a freedom not previously possible. These investors are concerned with two things in making their choice as to where there business will be placed: speed and accuracy of execution, and efficient use of their capital. With direct competition between exchanges on a product by product basis, and between brokers on a similar basis, service is the key. The evolution of industry clerical people is from back-office, a decades-old term, to “support”, a more recent description of their jobs, to front-line account management functions allied with sales and having a significant positive impact on firm profits and exchange volumes.

New products for this industry means new trading vehicles or new ways to trade old vehicles. A good example is the new ethanol futures and options contracts on the New York Board of Trade (NYBOT), which will start trading in May. Although NYMEX, the New York Mercantile Exchange, has long hosted successful energy futures and options contracts, including crude oil, natural gas, gasoline, natural gas, heating oil and electricity, NYBOT is an appropriate venue for ethanol, since most ethanol is produced from sugar and NYBOT is the parent body of the NY Coffee, Cocoa and Sugar Exchange. Many of the ethanol suppliers are also sugar suppliers, and ethanol will be traded in a manner similar to sugar. NYMEX, on the other hand, has not been asleep either. Using the systems and procedures it has developed for energy futures trading and clearing, it is positioning itself as the major clearing body for over the counter (cash market) energy transactions.

Technology continues to drive the evolution of the futures industry. Electronic trading, the foundation of the new, international electronic exchanges and a growing part of the older, “open outcry” (floor brokers in trading pits) domestic exchanges, is reshaping both the mechanics and culture of commodities trading. In additional, the continually growing need of brokerages and investors for timely, accurate and system-compatible information to flow throughout the entire process has put pressure on exchanges, clearing organizations and the brokerages themselves to rationalize and standardize the information flow. Investors and traders are demanding real-time on-line control of collateral, real-time position and trade reporting, and the ability to correct trade recording errors on-line. Clean communications from order entry through trade clearing and position reporting , as well as standardized data formats for each step of the process, have become a requirement that brokers, exchanges and clearing organizations are struggling to fulfill. At the exchange and clearing level, the newly implemented technological advances have made possible a consolidation of margining requirements, reducing the amount of capital tied up by members and traders in margin collateral, and has generated a host of new services from the exchanges that supply members and the general public with price information at reasonable cost, better trade reporting, and increased trading flexibility.

Operations has moved from being a necessary evil, best kept out of sight, to being an equal partner in the enterprise; one that helps acquire customers, fulfill regulatory requirements, mitigate risk and, in general, get the business done. The much-maligned, overworked, underpaid back office is finally getting its due.