As Derivatives Liquidity Moves, Firms Need to Be Ready

Early in 2021, the Futures Industry Association [FIA] conducted a survey of 270 individuals across a range of banks, brokers, exchanges and technology vendors, to assess the outlook for the global derivatives industry.  The results were enlightening.

Two-thirds of the respondents expected derivatives trading volumes to continue to rise in 2021, with derivatives on equities and commodities seen as having the highest potential for growth.  The Asia/Pacific region, particularly China, was also seen as a significant area of opportunity.

Brexit was cited as a disruptive factor, alongside the structural impact of market fragmentation as many firms relocated staff from UK to Europe and reoriented their systems to cater for the new post-Brexit rules.  And of course the significant influence of the pandemic and its ongoing ripples through the markets can’t be ignored.

A shifting liquidity landscape

Liquidity in the derivatives markets is never static and can shift rapidly to new trading centers under the right circumstances, as has been proven time and again.  For example when trading on Bund futures switched from LIFFE to Eurex (or DTB as it was then called) in the late ‘90s.

Are we seeing some similar shifts now?  London has traditionally dominated the interest rate swaps market for example, but since the start of the year, London’s market share fell from 40% to 10% as trading shifted to New York, according to a survey published by IHS Markit in February. Industry figures also show that Amsterdam has overtaken London as the share trading capital of Europe.  This year’s launch of CBOE’s European derivatives exchange and Euronext’s move to Italy changes and broadens the landscape further.

The plain and simple fact is that trading centers can move, so firms need to be able to react quickly to those movements. This can lead to problems if firms don’t have a flexible and adaptable trading infrastructure.

As new trading venues are established and as liquidity shifts, it is essential that firms have the appropriate access to the right venues and counterparts if they are to keep pace with the changes and stay competitive.

How can Pico help?

As the leading provider of technology solutions to the financial markets community, Pico has built a robust data center presence in all of the primary global market centers. We provide infrastructure hosting, mission critical network connectivity, market data, Corvil analytics, and cloud services in 45 data centers around the world, including those housing over 300 of the world’s cross-asset trading venues.

This means we can help firms to rapidly transition their trading infrastructure to wherever the liquidity is.  And our global network connectivity ensures that firms will continue to enjoy low latency access to trading venues and counterparties, wherever they are located.

In global financial markets, “The Freedom to Move Fast” is a critical success factor. Not just speed of data and speed of trading, but also speed of onboarding new markets, and of transitioning to alternative trading centers when it is warranted. Because Pico takes care of the technical challenges of connecting to a venue, we can provide clients with turn-key access for new venue connectivity, significantly reducing their time to market. In addition, clients have better control, better transparency, and better intelligence due to the visibility and insights from Corvil Analytics.

With the changing global landscape of today’s derivatives markets, whether because of Brexit or other potentially disruptive events, firms can rest assured that wherever liquidity goes, Pico will already be there to provide the necessary infrastructure for a seamless transition.