FX option trading – a typical arch

Just as in equity options, the core component is risk engine, because positions are large and long-term. See other reasons in my post on option trading systems.

— My hypotheses —
* I guess for both fx option and IRD, core engine is a realtime event-driven position updater (another side of the same coin as risk engine). Each position has a lot of contract attributes and risk attributes, all subject to frequent updates. A typical FX option desk probably has “too many” positions each reacting to a lot of events, but each update is complex and time-consuming.
* In contrast, cash desk has fewer positions and simpler positions.
* In bond trading, any non-flat position is also subject to updates in terms of marking and unrealized PnL, but calc is simpler.
FX option is an OTC market – “no electronic trading” (i guess no ECN either), but there are electronic trade messages in addition to manual trade booking. There’s also plan to access CME listed FX options. Note this plan is not about fx options on futures, and not about PHLX.

%Q: so is it voice based?
A: various means.

Clearing could be done at the London Clearing House. I guess London is a bigger center than NY.

A lot of “exotic” fx option products come online every year. There’s pressure to automate and speed up new product launch. I would guess 1) position management and 2) booking are among the most essential features needed by any new FX option instrument. System must be able to persist positions in these exotic options. If automatic STP booking is hard, then ops can manually enter them, assuming volume is low on new products.

Volume of Trades – FX options desk gets about 1500 trades/day. In contrast, FX cash desk (includes futures + forwards) gets about 100 times the volume, but profit is perhaps 2 to 3 times that of FX options desk, obviously different margins.

Volume of Positions – FX cash desk keep most positions flat so very few positions are non-flat. FX options desk has “too many” open positions, a big headache to risk engine.

Entire FX options desk needs about 20 desk-specific developers world-wide. Besides, I guess there are many supporting systems owned by other teams outside the desk. These teams include (not limited to) firmwide teams, probably further away from the profit centers.

FX option trading is more complex than FX cash trading.

Q: Are FX derivatives simpler than equity derivatives?
A: not necessarily. FX involves 2 interest rates. Eq involves dividends.

— system modules owned by dedicated desk developers–
FIX server (perhaps for market data, not e-trading?)
GUI is in Tcl, early versions of C# platform and WPF.
Market data is a major component in FX. Many modules react to market data —
– risk
– pricing
To traders, real time pricing is presumably more important  than risk is. I guess they need to send out updated bid/offer. RT pricing uses spot prices (market data) and volatility data for calculation. For any pair of currencies, (every?) market data could trigger Automatic price updates across all strikes and expiration.

Actual option valuation math is in c++/JNI.

Biggest headache in fx option risk engine is performance. FX Option Valuation is slow. FX option position Volume is too large for real time risk update. Instead, the risk “report” system is on-demand and covers a requested subset of the full portfolio, presumably those positions belonging to a trader. Such a report takes a few minutes. If market data has changed by then, report is obsolete.

Risk rollup from trader-level to entity-level to firm-level. There’s an external team responsible for analytics library and they call FX options system’s services to get positions. I guess that external system is a firm-wide analytics or risk engine.

#1 essential component (among the distributed components over 30 servers) in the trading desk is trade capture/booking, written in c++ primarily + some java. There’s some c++ valuation module for FX options. Plan is to slowly phase out c++. Other than that, desk is mostly java.

–core architecture–
Since an option (or any derivative) is not settled right away like cash trades, there’s a _lifecycle_ to each derivative trade. Each derivative trade takes on a life of its own and is subject to many “lifecycle events” like
– origination, cancels, amends/modifications
– knock-in, knock-out
– fixings
– market data effecting risk reassessment

Just like bond repricing engine, this is Service Oriented Architecture – MQ facilitates the event-driven architecture, but there are other ways to pass messages like SOAP over TCP (not http).
1) MQ for high volume messages
2) SOAP for slow, complex processing. Possibly a few trades a day! I guess these are exotic products.
A typical event-driven server here is a socket server, holding a thread pool, started with main(). No container or web server.

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