eq listed drv desk

Some basic info from a friend –

Equity Listed derivatives – mostly options on single stocks or options on index/future, but also variance-swaps. Even if a stock has no listed options, we would still create a vol surface so as to price OTC options on it, but the technique would be different — The standard technique if given many pairs of {expiration, strike} is to fit a curve on a single expiration, then create similar curves for other expirations on the same underlyer (say IBM), then try to consolidate all IBM curves into a smooth IBM vol surface. Each “point” on the surface is an implied vol value. I was told some of the more advanced “fitting” math is extracted out into a C++ quant lib.

Instrument pricing has to be fast, not multi-second. I guess this is pre-trade, RFQ bid/offer pricing, similar to bond markets’ bid-wanted. In contrast, the more “real” need for vol surface is position pricing (or mark-to-market), which provides unrealized PnL. I feel this is usually end-of-day, but some traders actually want it real time. Beside the traders on the flow[3]/listed/OTC derivative desks, the vol surface is also used by many other systems such as structured derivatives, which are entirely OTC.

It’s quite hard to be really event-driven since they are too frequent, instruments too numerous, and pricing algo non-trivial, exactly like FX option real time risk. Instead, you can schedule periodic repricing batches once a few minutes.

About 3500 underliers and about 450,000 derivative instruments. Average 100 derivatives on each underlier (100 combinations of strike/tenor). S&P500 has more than 1000 derivatives on it.

Market data vendors — Reuterss, Wombat, Bloomberg.

Inputs to vol calculation — product reference (strike/tenor), live market quotes, dividend, interest rate …

One of the most common OTC equity derivatives is barrier option.

Pricing and risk tend to be the most mathematically challenging.

Exchange connectivity is usually c++, client connectivity (clients to send orders or receive market data) is usually java.

[3] Flow means agency trading, most for institutional clients. Retail clients are very wealthy. Those ordinary retail investors won’t use an investment bank. Flow equity derivative can be listed or OTC.

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