- 2 - Does the evolution of Financial Exchanges point the way for B2B? Andy Gueritz, March 2001 © 2001 Sixhills Consulting Ltd & Author Trading Engine Functionality and Exchange Revenue Generation So that we could lay out the landscape for trading engine functionality, we created a framework of the key drivers of functionality of the major engine classes. In building the framework, we found that there are two key dimensions: trading model and product.  Trading model. The trading model drives the functionality required to find counter-parties with whom to trade. Secondary drivers include regulatory requirements (which vary by geography), anonymity, credit risk management method, and transaction type (i.e., order vs. quote). There are four main models used to trade financial instruments: - Bid/Ask – where bids and offers (usually anonymously) are matched automatically, electronic stock exchanges and ATSs1 offering order crossing are typical examples. When automated, traditional open outcry exchanges convert to electronic bid/ask exchanges; - Specialist – where a specialist has an exclusive right to make a market in a particular instrument. This is a traditional model employed by very few exchanges which typically do not trade electronically (NYSE, the world’s largest stock exchange is the dominant example); - Bilateral negotiation – essentially a 1:1 model where the main component of work is finding your trading partner followed by negotiation and transacting. This model is most frequently used for trading low volume, complex instruments and the key online functionality is a powerful product search capability combined with support for the price negotiation (on various product parameters). Typical examples and the dealer and inter-dealer systems (which support a proportion of the OTC2 trading); - Auction/Reverse Auction – these models are relatively familiar and offer trading between one seller and many buyers (auction) or one buyer and many sellers (reverse auctions) to negotiate on price, typically over a fixed period. The predominant electronic systems are 1 ATS = Alternative Trading Systems, comprising the partially regulated or unregulated trading systems, such as ECNs and Order Crossing systems, Bond Auction systems, Dealer and Inter-dealer systems 2 OTC = Over the counter – i.e., instruments not traded on the formal stock exchanges Trading ModelProduct• Drives data content• Drives settlement/ clearing requirements• Consolidation of instruments traded drives the need to support greater diversity• Drives data content• Drives settlement/ clearing requirements• Consolidation of instruments traded drives the need to support greater diversity• Trading model primarily drives the search functionality. Other drivers include regulatory requirements, anonymity, clearing vs credit-based and order vs quote• Trading model primarily drives the search functionality. Other drivers include regulatory requirements, anonymity, clearing vs credit-based and order vs quoteKey Dimensions of Trading Engine Functionality Trading Model Clu st ers Prod uct Bid /Ask Specialist Bilateral Auct ion/ Reverse Auct ion Spot ( Non-Fin ancial) Equities Bonds Underlying Eq uities/Bonds F inancial Non-F inancial Derivatives Finan cial/Non-F inancial F inancial Composite* Finan cial/Non-F inancial * Trading derivatives and equities and/or bondsTrading ModelProduct• Drives data content• Drives settlement/ clearing requirements• Consolidation of instruments traded drives the need to support greater diversity• Drives data content• Drives settlement/ clearing requirements• Consolidation of instruments traded drives the need to support greater diversity• Trading model primarily drives the search functionality. Other drivers include regulatory requirements, anonymity, clearing vs credit-based and order vs quote• Trading model primarily drives the search functionality. Other drivers include regulatory requirements, anonymity, clearing vs credit-based and order vs quoteKey Dimensions of Trading Engine Functionality Trading Model Clu st ers Prod uct Bid /Ask Specialist Bilateral Auct ion/ Reverse Auct ion Spot ( Non-Fin ancial) Equities Bonds Underlying Eq uities/Bonds F inancial Non-F inancial Derivatives Finan cial/Non-F inancial F inancial Composite* Finan cial/Non-F inancial * Trading derivatives and equities and/or bonds
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