ALGO UPDATE: UBS Brings Low-Touch Trading to Derivatives

UBS has launched a new algorithm trading platform designed to handle more complicated equity derivatives and their strategies.

The bulge firm’s goal – make the trading of more complex Over-The-Counter derivatives as simple as trading cash equities.

Buysiders looking to trade derivatives such as options are now going to have the same tools that equity traders have to execute their simple and more complex orders electronically. And they can do it directly from the order or execution management system of their choice, broker, third party or proprietary, via FIX connection.

The platform, dubbed SwapsDirect, is a high-capacity platform that can handle U.S. basket or single-stock swap orders, including master limited partnerships, real estate investment trusts and exchange traded funds. The platform not only assists in order execution but it also automates the processing of trade confirmations to ensure efficient workflow for these and other over-the-counter derivatives.

UBS told Traders that equity swaps are increasingly seen by institutional investors as an efficient way to gain customized long or short exposure to specific stocks, asset classes or sectors, to take on hedges and to quickly express their market view – thus the need for an electronic trading platform such as SwapsDirect.

With over two years of development, testing and preparation in anticipation of future regulation, UBS delivered the electronic trading platform that incorporates order management, execution and risk management all into a single offering.

“Trading swaps has not traditionally linked higher-speed/lower-touch execution with operational efficiencies,” Ryan Nelson, head of Americas synthetic equity distribution told Traders. “Clients accepted the more gradual speed of swaps trading for such efficiencies as ease of settlement and reporting. Now we’ve solved this problem by giving clients the speed of execution that they have come to expect from executing a cash trade, while also maintaining the full operational efficiencies that they have come to demand in swaps.”

Tom Regazzi, head of Americas synthetic equity trading added that the different or bilateral nature of swaps made for a long development process.

“We wanted to take what was a highly manual process (trading swaps) and combine it with a suite of algos and a make trade execution as easy as possible for the client,” Regazzi said. “We also wanted to get a better sense of what our clients wanted in the offering – including the inclusion of risk management tools, helping them meet their compliance requirements, building the decision making engine. The last part was trying to hit the moving target that is regulation in the OTC swaps market.”

Regazzi explained that routing orders and executing equity swap trades, as well as for other equity derivatives is more complex than for cash equities. However, with SwapsDirect the process has become more seamless and clients can execute a derivative trade in an algorithm just like they would a cash equity security.

“The swap trade now has the same flavor and taste of an equity trade,” he said. “The user has access to TWAP, VWAP or other customized algos.”

And the platform sends the order through a type of smart order router, ensuring the best execution as possible. Furthermore, UBS gives users access to real-time risk management tools, allowing traders to view the economic impact of trades at the time of trade, not at the end of the day or even at T+1. Regazzi likened it to the trade cost management systems employed by cash equity traders.

Institutional users not only gain speed via SwapsDirect’s electronic order handing but also gain operational efficiency and simplicity in the trading process, said Nelson. And it doesn’t take away the buyside trader’s ability to set his desired strategy, parameters of establishing economic exposure and the assurance of protection from the information-barrier framework.

“We’ve taken opaqueness of OTC market and added a level of transparency here,” said Nelson.” The more transparent the process, the more likely they are to trade with us.”

And by adding a low-touch element to trading swaps and other derivatives, Nelson said neither high-touch traders nor their buyside counterparts need to fear – the high-touch sales trader isn’t going away any time soon.

“Clients can still trade product high-touch, but SwapsDirect gives clients an option now in trading them,” Nelson said. “People using SwapsDirect see how this system is similar to the the day-to-day process of handling cash equity orders.”