January 2018 Moscow Exchange DERIVATIVES MARKET INDICATIVE QUOTE SYSTEM

Transcription

1 January 2018 Moscow Exchange DERIVATIVES MARKET INDICATIVE QUOTE SYSTEM

2 Futures Options TRADING VOLUMES POTENTIAL OF LOW-LIQUIDITY INSTRUMENTS Trading volumes % 50% 0% Equity Market vs Derivatives Market, RUB bln SBER GAZP LKOH GMKN ROSN ALRS MGNT SBER GAZP LKOH GMKN ROSN ALRS MGNT Фондовый Equity Market рынок Срочный Derivatives рынок Market Derivatives to equities volume ratio Futures vs Options, RUB bln Фьючерсы Futures Опционы Options 0 30% 0% Si RTS BR ED SBRF GOLD Eu Si RTS BR ED SBRF GOLD Eu 0 Options to futures volume ratio The ratios of derivatives market volume to equity market volume and option volume to futures volume decline as liquidity decreases Therefore, low-liquidity instruments have undeveloped potential 2 Figures on this page are ADTVs for 2017

3 INDICATIVE QUOTE SYSTEM (IQS) FOR LOW-LIQUIDITY CONTRACTS ONLY The IQS aims to stimulate trading in low-liquidity instruments and unlock their potential. Non-liquid derivative contracts Example Liquid hedging instruments Non-liquid futures on liquid underlying assets RVI, CY, UTRY, non-liquid single stock futures Underlying asset Liquid futures with the furthest expiry RTS, Si, Eu, ED, MIX, MXI, liquid single stock futures Nearby liquid futures Non-liquid derivative contracts in correlation with instruments of other venues Futures with far expiry: BR, GOLD, SILV, PLT, PLD Instruments offered by other trading venues Options Options: single stock options, MIX, MXI, GOLD, SILV, ED, Eu, GBPU, UJPY Far option series: RTS, Si, BR Underlying asset 3

4 NEW TRADING MODE IN INDICATIVE QUOTES Problems with quotation of nonliquid instruments IQS provides a solution to the problem Quotation of a large number of instruments uses up initial margin Indicative quotes do not require initial margin. Accounts are checked after matching before the trade is executed At times of rapid price movements there is execution risk with reentering orders and potential to trade at an unfavorable price The passive counterparty confirms quotes and thus limits the risk associated with rapid price movement Minimizing opportunity cost of initial margin and elimination of trade execution risk can increase the profitability of many trading strategies on non-liquid instruments. Client profile Private investors, who: Liquidity taker Are interested in trading non-liquid instruments; Trade manually ; Take directional long/medium term positions; Are less sensitive to execution, ready to accept a price slightly worse than the theoretical level. Liquidity maker Algotraders, wishing to quote any derivative contract provided that: Risk can be hedged with liquid instruments; The price will be at least a little bit better than the theoretical price. 4

5 BASIC PRINCIPLES OF OPERATION INDICATIVE QUOTE SYSTEM (IQS) An additional trading mode will be established for non-liquid derivative contracts with the use of indicative quotes: Indicative quotes are not checked for initial margin on entry. Margin is verified after matching, but before the trade is finalized. Liquidity maker can confirm or reject a trade with the Liquidity taker within 0.2 seconds. A system that monitors confirmations and deletions ensures and stimulates frequent trade confirmations and reliable quotes. IQS algorithm: I phase Quote entry and matching II phase Order management system III phase Execution of the trade 5

6 I PHASE: MATCHING OF QUOTES Quote entry Matching List of indicative trades is formed A client enters a quote via the gateway CGate and FIX transactional API are supported Order-driven market An incoming quote is matched against counter quotes List of counter quotes is hidden for clients Matched pairs of orders constitute an indicative trade An indicative trade is a intermediary stage of the matching process An indicative trade differs from a standard trade in that it carries a different status until the trade is confirmed Changes in quotes and creation of indicative trades are shown in data feeds 6

7 II PHASE: OMS (ORDER MANAGEMENT SYSTEM) Confirmation of the indicative trade pending from the passive counterparty Entry of the active direct order to the primary core Entry of the passive direct order to the primary core Matching condition pending from the core The passive party is prompted to confirm the trade after the forming of an indicative trade An off book order is created based on the indicative trade. This order is transmitted to the SPECTRA core An off book order is created based on the indicative trade. This order is transmitted to the SPECTRA core Following the trade matching, the indicative trade is flagged with the status executed If an indicative trade has not been confirmed, its flagged with the status not executed with reason listed as not confirmed The order is verified for sufficient margin by SPECTRA regular procedures If the order is rejected, the indicative trade is flagged with the status not executed with reason listed as not collateralized The order is verified for sufficient margin by SPECTRA regular procedures If the order is rejected, the indicative trade is flagged with the status not executed as not collateralized If an error occurs in matching, the indicative trade is flagged with the status not executed with reason listed as matching error If the order matching fails, the system cancels the orders in the SPECTRA core Changes in the statuses of indicative trades are shown in the CGate data stream Off book orders and trades are shown in7 the main SPECTRA streams

8 III PHASE: SPECTRA CORE Receiving an order from the active counterparty in the indicative trade Receiving an order from the passive counterparty in the indicative trade Trade generation Market data generation The core receives an off book order from the active (taker) side in the indicative trade with the trade parameters (price and size) The core receives an off book order from the passive (maker) side in the indicative trade with the trade parameters (price and size) If two orders are successfully submitted and matched, the trade is generated The core generates market data based on orders and trades The order undergoes the usual checks in the core, including a check for sufficient margin. The order undergoes the usual checks in the core, including a check for sufficient margin. Orders have a unique number to guarantee no cross matching with other quotes The market data is disseminated in regular data feeds via Cgate and FAST API 8

9 ARCHITECTURE OF THE INDICATIVE QUOTE SUB-SYSTEM IQS Fix IQS Quote Reply IQS Proxy Quote book Event replica OMS Spectra core Market data Private market data Market data services Event replica Persistence Proxy Order 9

10 MONITORING SYSTEM FOR INDICATIVE TRADE CONFIRMATIONS The purpose of the monitoring system for trade confirmations is to increase the percentage of confirmed quotes. A penalty level is determined as a non-integer number from 0 to 10 (the less, the better) for every unique combination of <client code, underlying asset, futures/option>, at any specific time. The penalty level increases if: A market participant refuses to confirm an indicative trade to which it is the passive party (+1 to the penalty level). This applies no more than once a second. Upon unsuccessful submission of a binding order, where the market participant is the passive party in an indicative trade (+1 to the penalty level). This applies no more than once a second. Upon unsuccessful submission of a binding order, where the market participant is the active party in an indicative trade (+1 to the penalty level). Where the penalty level reaches an integer value, punitive measures may be applied: Cancellation of active indicative quotes. Time-out: rejection of new indicative quotes for a specified period. The penalty level decreases: Every ~60 sec by a fixed value (~1) for all client codes not subject to time-out. Preliminary parameters of sanctions: Penalty level Order cancellation (Y/N) No No Yes Yes Yes Yes Yes Yes Yes Yes Time-out (мм:ss) 00:00 00:00 00:00 00:10 30:00 600:00 600:00 600:00 600:00 600:00 10

11 LEGAL FRAMEWORK FOR INDICATIVE QUOTE SYSTEM (IQS) Indicative quote is a specific type of anonymous order for concluding derivative contracts. Such orders are subject to all the regulations applicable to on-exchange trading and anonymous orders, including regulations on market making. Indicative quotes are entered into the trading system and recorded in the transaction register. After an indicative quote submitted during trading hours is successfully checked for any applicable bans (the prohibition system), it is recorded in the order register. Such indicative quotes become available for trading (active) in the indicative quote order book. The following conditions should be met to allow a trade to be executed based on an indicative quote: 1) The indicative quotes should be pre-matched (indicative quote matching; indicative trade); permissible counter orders are flagged with a special status; 2) Both orders should be successfully checked for sufficient margin (only the volume of matching orders is checked); 3) Compliance with other terms of the order. If the conditions above are met, the Exchange sets the matching indicative quotes as finally matched and records the contracts in the register. 11

12 TECHNICAL SPECIFICATIONS INDICATIVE QUOTE SYSTEM (IQS) Transactions Support of two interfaces: cgate and FIX Specific access points are created for IQS Same logins are used Market data Support of two interfaces: cgate and FAST Independent data dissemination points for IQS Data streams similar to major ones such as orders_log, deals, aggr and common are supported via cgate Additional streams include tables with indicative trades statuses and current penalties Main streams of cgate will obtain new technical orders and trades. This allows the creation back office records without IQS data streams 12

13 ACCESS INTERFACES INDICATIVE QUOTE SYSTEM (IQS) The Plaza2, FAST and FIX protocols are used to connect. The TWIME protocol is not supported. Separate connections are set by using specific logins. Tables and transactions: Transactions similar to existing ones in terms of functions: quote entry, modification and deletion The indicative trade confirmation transactions Tables similar to the standard trading mode in terms of their structure: orders, trades, guides, aggregated order books, common New tables: Table Purpose Columns user_qdeal_state user_deal fines_level penalty_log Trade status: confirmation pending, collateral verification in process, successfully executed, not executed, etc. Indicative trades and trades mapping. Translation of the current penalty level in the monitoring system for confirmations. Only strings with non-zero penalty levels are given. The log of the monitoring system for confirmations on mandatory deletions of quotes and bans on new quotes at high penalty levels. Indicative trade ID; status ID; other background information. Indicative trade ID; trade ID; other background information. Client code; underlying asset code, instrument type: futures / option; penalty level; penalty level recalculation time. Client code; underlying asset code, instrument type: futures / option; penalty level for which punitive measures were applied; the quotes deleted flag; the timeout on flag; punitive measures period; timeout period expiration. 13

14 REPORTS INDICATIVE QUOTE SYSTEM (IQS) In the currently existing report, trades executed based on indicative quotes are shown as off book trades. A new report on indicative trades with: Basic information on an indicative trade (with the structure similar to that used in the main trading mode report f04/of04) Indicative trade status: executed, not confirmed by the passive counterparty, margin sufficiency check not passed, counterparty's margin sufficiency check not passed, interrupted (trading had been suspended for clearing prior to the trade being completed) A new report on indicative trades and trades mapping with: Indicative trade ID, Basic information on the trade (ID, etc.) Note: one string in the report corresponds with one trade. In the next version of the system, one indicative trade may correspond with several strings. 14

15 ROADMAP FOR INDICATIVE QUOTE SYSTEM (IQS) 2018 Q Q2 Up and running Public test Updates following the public test Potential for development Not implemented at the 1st stage Simplified pre-trade check: margin requirements are set for every separate quote; A mechanism to transfer indicative quotes to the main trading environment if the indicative and ordinary orders can be matched; Quotation of multi-legged strategies; Quotation of options in terms of volatility. 15

16 APPENDIX 1. TERMS AND DEFINITIONS Term Indicative quote Limit quote Definition Trading instruction without margin check. Two order types are allowed: Limit and Immediate or Cancel (no Fill-or-Kill orders). Indicative quote that stays in the book if it has been matched in part or has not been matched at all (similar to quoted orders in the central order book). Immediate or Cancel quote Indicative quote that is deleted from the system after the auction if it has not been matched. Its unmatched part is also deleted, if the quote has been matched in part (similar to the counter order in the central order book). Indicative quote order book The list of active indicative quotes in the instrument. Indicative trade A preliminary trade arising out of indicative quotes matched. Trade A trade recorded as executed. 16

17 APPENDIX 2. GUI AS IN THE SPECTRA TERMINAL 1/4 Instruments in indicative quote mode are shown in the general list of instruments They can be filtered by the trading mode Instrument list Sorting by trading mode Options board 17

18 APPENDIX 2. GUI AS IN THE SPECTRA TERMINAL 2/4 Order books for the indicative quote system Indicative quote order books are displayed similar to currently existing ones The IQ button allows switching between the main trading mode and indicative quotes 18

19 APPENDIX 2. GUI AS IN THE SPECTRA TERMINAL 3/4 Order entry window Looks absolutely the same as the main trade window Orders are entered under the Indicative quotes setting 19

20 APPENDIX 2. GUI AS IN THE SPECTRA TERMINAL 4/4 The following information appears upon trade execution: Information on the order filled and the trade in indicative quotes Information on technical direct orders and trades Records can be filtered by trading mode Quotes entered via the terminal are confirmed automatically Order Window Trade Window Sorting by trading mode Sorting by trading mode 20

21 THANK YOU Business analytics and IT development for the Derivatives Market Analysis and monitoring of market makers IT development and business testing

22 DISCLAIMER