Tuesday, June 5, 2012

how important is automated pricing engine? ask veterans

I proposed/hypothesized with a few pricing engine veteran friends that the big make-or-break trades and successful traders don't rely so much on pricing engines, because they have an idea of the price they want to sell or buy. However, my friends pointed out a few cases when a pricing engine can be important.

- Risk management on a single structured/exotic position can involve a lot of simulations.
- If u have too many live positions, pricing them for pre-trade OR risk can be too time consuming and error prone.
- If you have many small RFQs, trader may want to focus elsewhere and let the system answer them.

How about those make-or-break big trades? Volume of such trades is by definition small. Decision maker would take the pricing engine output as reference only. They would never let a robot make such big decisions.

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