Options Technology- Build vs Buy

Feb 13, 2014

Henry Schwartz – President, Trade Alert

Technology drew me into the options business nearly 30 years ago.  As a teenager growing up in Northern California, I’d heard rumors about a “blackjack genius” with a “mysterious stack of computers humming away in his garage” not far away.   To a geeky kid circa 1983 this was a big deal (think ‘War Games’ with Matthew Broderick) and to my amazement Blair Hull offered to give me a peek at the operation which would evolve into a global market-making powerhouse known as the Hull Trading Company.  Within 10 years Hull had 25% market share in SPX and traded nearly 10% of the US single stock options. The firm expanded overseas where the earliest electronic markets were a perfect fit for the firm’s trading style and in 1999 the firm was sold to Goldman Sachs for $531M.

From day one Hull put incredible emphasis on the value of quantitative modeling and cutting-edge technology.  When I started as a runner it was clear that technologists ran the show (despite what the floor traders would tell you), and many of Hull’s early accomplishments in real-time pricing and risk management are considered absolute necessities on trading desks today.  One notable difference, however, is that many of today’s trading tools are provided by third party vendors whose systems perform many of the most common tasks in the trading process, with economies of scale that result in better systems at lower cost, while simultaneously permitting firms to allocate resources to their most valuable (often top-secret) proprietary projects.

Build versus Buy is a decision faced frequently by today’s equity derivatives professionals.  From off-the-shelf market-making software to turnkey algorithmic solutions, to industrial strength order management and more, things are possible today that used to take years and hundreds of thousands of dollars to put together.  A snapshot follows, but the list is always changing (and I apologize for any errors).

Equity Derivatives Systems

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The variety and quality of third party systems for equity derivatives indicate a level of maturity in options markets.  Greater efficiency and innovation are the result, supporting continued growth as we move forward together.

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