Saturday, July 16, 2011

how time-consuming is your pricing algo

I would say "at most a few sec" in most cases for bonds with embedded options [1]. My bond trading systems typically reprice our offers and bids in response to market data and other events. There can be a lot of these events, and the offers go out to external multi-dealer brokers as competitive offers, so delay is a minor but real problem. Typically no noticeable delay in my systems, due to the fast repricer.

[1] though OAS and effective duration could take longer, but those aren't part of basic pre-trade pricing(??)

Post-trade risk valuation and low-volume pre-trade pricing can afford to be slow, but in my systems, there are typically 10k - 50k positions, so each position must not be too slow.

In another systme i worked on, we run month-end market value pricer. Probably using published referenced rates. No simulation required.

My friend's friend briefly interfaced with an FX option system, where a single position in a complex derivative could take 5 - 10 minutes to price -- in pre-trade. Traders submit a "proposed deal" to the pricer and wait for 5-10min to get the price. Traders then adjust this "auto price" and send it out. I would guess the pricer is simulation based and path-dependent.

If pricer takes the firm's entire portfolio as input to evaluate the proposed deal, then it qualifies as a pre-trade risk engine.

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