How to Build a Futures Trading System
At Devexperts we’re always keen to share the insights we’ve gathered over the years as a fintech provider. Lately, there’s been increased interest in the development of futures trading platforms, as well as other futures trading software components required to start a derivatives trading business.
In the following article, we’ll present some of the things you should keep in mind if you’re interested in the above. More than a “how to build a trading platform” article, we intend to focus on the various pieces of technology required by different futures trading businesses, from full-blown futures exchanges, to retail brokers offering market access to individual investors.
In-house or outsource?
This is the burning “to be or not to be” question that always seems to be front and center for financial services firms. As a fintech development house, we obviously have a stance on this issue that’s difficult to separate from our business model and company mission.
However, as you’ll see below, Devexperts isn’t in the business of finessing our clients into choosing us over others, or indeed over their own capabilities. We create off-the-shelf components that can be integrated individually or arranged together as turnkey solutions.
We’re also well-versed in building things from scratch as custom developments, and in working with existing in-house systems, as well as integrating our technologies with those of other third parties. In other words, we meet our clients where they are, proposing and implementing solutions based on their current and future needs.
We do believe that the cost associated with a lot of in-house development, which includes monetary, time, and human capital considerations, as well as the on-going operational expenses required to maintain and update in-house developed systems, can cause the scales to tip in favor of outsourced development.
This is particularly so in the case of financial software, which is so central to a business’s competitiveness and bottom line. Having said that, a lot of our clients do great in-house work, and only require our expertise for specific areas of their overall business needs. Okay, with that out of the way, let’s continue.
Hardware or software setup?
The type of hardware required for your futures trading business depends on what kind of entity you’re planning to operate. Exchanges and market makers, for instance, or algorithmic and high-frequency trading (HFT) operations, have far less tolerance for latency and so require much more extensive hardware setups.
In order to get latency down to those critical sub-100 microsecond order processing times, “bare metal” installations are required. These involve physical servers equipped with networking cards that support hardware acceleration, allowing the operating system to be bypassed in order for data to be sent directly into the network.
For firms whose business depends on trading directly with existing exchanges, these physical servers must be collocated at the exchange data centers in question. Every microsecond counts for these entities, so much so that at these minute slices of time even cable lengths become a consideration.
Depending on where in the liquidity pyramid your firm is located, you may not require any of the above. The traders of other types of futures businesses, such as retail futures brokers, do not have the same strict latency requirements and so these can be set up using virtual machines, Software-as-a-Service solutions (SaaS), and can serve clients by integrating with execution destinations such as CQG or StoneX.
User interface requirements
Your futures trading business will require a number of different interfaces. These are required for clients to be able to interact with your trading systems, but also for your own staff to manage operations.
The two most fundamental of which are the futures trading platform and the administrative user interface. Your futures trading platform is a client-facing user interface allowing clients to chart available instruments, input orders, and manage their accounts.
The administrative UI provides your venue’s admins with a bird’s-eye view of what’s taking place on the various markets you offer, including orders, trades, and exposure, as well as the ability to zoom in on groups, clients, and symbols in order to make necessary risk management adjustments.
Beyond these, your business will also require other UIs for technical staff to monitor the current health of system hardware and software, as well as UIs specifically designed for back-office staff to interact with external clearing and settlement services, and for compliance and reporting use cases.
The best all-round solution for futures brokers sourcing their liquidity from execution venues, is a trading platform that comprises the client-facing frontend for order input and account management, the backend for risk management administration staff, a capable order management system (OMS) that sits between the two, as well as the flexibility to integrate other important third-party externals such as customer relationship management (CRM) and compliance software via an open and thoroughly documented API.
Connectivity
Order entry gateways such as REST API or FIX protocol are required for clients to be able to send order instructions and receive order execution confirmations.
A database for storing full event histories for clients, business operations, and reporting purposes can be connected to via REST API. This is required in order to be able to pull up all order entry details, confirmations, and trade histories.
Websocket feeds are used to distribute market data to clients. These feeds allow clients to subscribe to one-way data streams that include instrument price action and order book updates. Websocket connections are also used so that the venue is able to subscribe to market data and receive order execution reports from its own liquidity providers.
Matching engine
The heart of any financial exchange is its matching engine. Our own matching engine is a clustered, replicated state machine that utilizes the RAFT protocol to achieve distributed consensus. This matching engine is an example of a Devexperts component that can be sourced in isolation, or be part of a larger “from scratch” development.
Matching engines are required to support a variety of different order types such as Limit, Stop, Stop Limit, and Market. They also require an execution algorithm to define how incoming orders are processed. First in, first out (FIFO) is an example of such an algorithm that executes orders according to price-time priority.
A variety of different order execution rules must also be supported, such as DAY (valid of the day), GTC (good till cancelled), FOK (fill or kill), and IOC (immediate or cancel), as well as the ability to manually modify and cancel orders, as well as the handling of trade busts and corrections.
Your matching engine also has to be able to recognize a variety of different market states, such as: Pre-open, Open, Paused, Halted, and Closed.
To maintain control over system-wide risk, risk management features such as exposure limits, soft and hard price limits, configurable self-match prevention, and price banding should be available, as well as a universal kill-switch.
In order to be able to scale horizontally, and to be able to easily add new instruments without experiencing downtime, the system should support the running of multiple matching engine instances.
Futures specific considerations
Owing to certain complexities specific to the trading of futures and options, your trading platform architecture must be equipped to implement different margin calculation methodologies depending on the business in question, its jurisdiction, and business-specific risk management practices.
Two popular margin calculation methodologies for futures trading are SPAN (Standard Portfolio Analysis of Risk) and Reg T (Regulation T). SPAN is a methodology that calculates margin requirements according to assessments of global one-day portfolio risk, rather than that of individual positions. Reg T determines the percentage of the purchase price of a security a trader may borrow from a trading venue (the Federal Reserve Board has set the maximum at 50%).
Margin methodologies like SPAN and Reg T are important for risk management as they ensure that traders have sufficient capital to cover losses in a variety of market scenarios. Methodologies such as SPAN require complicated real-time calculations that take multiple factors into account such as volatility, decreases in time to expiration, strike prices and risk-free interest rates.
The order management system (OMS) in question must be equipped with algorithms that can handle the combinatorial explosion that results when these multiple factors are computed for large numbers of orders, as well as the ability to differentiate between SPAN-eligible and SPAN-ineligible securities, and to apply different methodologies to the latter.
Futures order management systems are required to perform these complex pre-trade validations, as well as to constantly monitor post-trade health so that positions may be automatically liquidated when certain criteria are met. These are much more complex when using methodologies that factor in overall portfolio risk rather than individual position risk.
Trading platform essentials
In recent years, the bar has been raised significantly as far as trading platforms are concerned. Today, traders expect your platform to be a single point of contact with your business, where they can register, get verified, deposit/withdraw, trade, and manage their accounts all from the same interface.
Beyond this, flexibility of access is also a must, with web-based and mobile instances of your platform expected to perform just as well and provide the same great user experience as your desktop version.
It should also be customizable to a high degree, enabling your customers to rearrange all the various on-screen components in a manner that suits them and that are most intuitive to navigate given their trading style. If sourcing a third-party platform, it will also have to be sufficiently customizable on your end so as to allow your offering to stand out from that of your competitors.
For futures and options-specific implementations, it will have to be connected to price feeds from exchanges such as the Chicago Mercantile Exchange (CME), Intercontinental Exchange (ICE) and Chicago Board Options Exchange (CBOE), integrate with Futures Commission Merchants (FCMs) and provide features such as Depth of Market (DOM) ladder trading and support for different margin calculation methodologies (such as the CME’s SPAN discussed above).
Order processing and risk management must be performed according to the criteria set by the relevant regulatory authorities that apply to your jurisdiction, and must include the flexibility for your business to be able to apply its own custom rules for risk management.
Third-party integrations
Whether developing your futures trading system in-house, or outsourcing it, there will inevitably be some degree of third-party software integration necessary. CRM, compliance, customer service, market news, technical analysis, and market data are all examples of software that may be necessary to outsource.
For all these systems to work together in a seamless manner, they have to be integrated together correctly, which requires quite specific technical know-how. When selecting vendors, in our experience, it’s important to select companies that share and document their APIs. This makes integration a much smoother process that can even be performed in-house, and reduces the likelihood of vendor lock-in. At Devexperts, we make our APIs public for this reason.
Disaster recovery
Recovery strategies vary from venue to venue and are dependent on the cost of disruption for the business in question. Exchanges and large institutional participants have almost zero tolerance for system disruption. These financial entities require elaborate disaster recovery solutions that include duplicate bare metal systems hosted in geographically diverse data centers that allow complete system replay to be initiated shortly after an unforeseen break in service.
Smaller retail enterprises that, likewise, consider the cost of downtime unacceptable have been known to create system redundancies by running a duplicate trading infrastructure from a different vendor designed to be able to keep trading services running when their main systems are down for maintenance, or due to some other unexpected disruption.
These systems are temporary in nature and are only intended to keep trading activity available until the main system is back up and running. We have designed and implemented such failsafe systems for our clients.
Alternatively, another approach to disaster recovery is to have a duplicate system running in parallel as per the first example, but instead of duplicate physical servers, the redundancy is created in a cloud environment in geographically distributed data centers. This latter strategy is more affordable and allows smaller entities to implement resilience strategies that were once out of their budgets.
Our approach to trading systems
Over the years, we’ve been privileged to work on most of the technologies that brokers and exchange venues rely on, such as trading platforms, order management systems, matching engines, connectivity solutions, and more.
This process has informed our approach, which focuses on creating standalone components that can be sourced by clients individually or combined in different configurations in order to create complete trading solutions for financial businesses.
Our extensive experience as a custom development house also comes into play for clients that have additional requirements. In situations where they require a little more than a combination of our existing components, we’re always willing to go that extra mile and create custom solutions, or to integrate products from other vendors, in order to bridge the gap.
Devexperts trading solutions
Broadly speaking, the components that Devexperts is best known for are as follows:
Charting libraries & trading platforms: Whether seeking a charting interface or full trading platform, Devexperts makes a number of versions of its professional UIs available to a variety of financial services businesses. Our DXcharts product covers clients that don’t require the trading component, while different versions of our flagship DXtrade platform have been created to specialize in: OTC derivatives such as CFDs, spot equities, listed derivatives such as stocks, options, futures, bonds, and mutual funds, as well as both spot and margin crypto products.
Matching engines: Our turnkey DXmatch solution has been developed to be the centerpiece of a variety of trading environments including stock and derivative exchanges, electronic communication networks (ECNs), dark pools and other alternative trading systems (ATS), crypto exchanges, and NFT marketplaces.
Order management systems (OMS): Our broker-neutral DXOMS order management system features an open architecture allowing for ease of integration with a variety of external applications including platform frontends and risk management systems.
Risk management solutions: Our multi-asset risk management and pre-trade control solution comes bundled with the DXtrade platform and offers brokers exhaustive real-time monitoring and control of exposure, as well as surgical hedging features such as the ability to run differing A/B book profiles, internally manage equity orders fractionally, and apply different margin settings, all on a per group, per client, or per instrument basis.
Market data solutions: Via our subsidiary dxFeed, we offer institutional grade, tick-level, low latency financial data to a host of different market participants via an accessible API. dxFeed also offers a variety of advanced solutions for firms seeking to create their own custom indices
Learn more?
Despite the extensive explanations provided above, it’s difficult to cover all possible permutations of what a futures trading system might look like according to the specific segment of the market it seeks to serve.
We hope we’ve been able to clue you in to some of the things to consider and to look out for, as well as offering our own perspective on how such systems should be put together and/or sourced.
To learn more about our development process, or to discuss any of the topics raised above, please don’t hesitate to get in touch with our team.