Building and Launching a US-Regulated Futures & Options Exchange From the Ground up
Case study

Building and Launching a US-Regulated Futures & Options Exchange From the Ground up

About the Client

The Client is a futures and options exchange launched in 2020 in the US. It aims to bridge the product gap for investors of all sizes by offering smaller and simpler futures and options products. It facilitates the trading of exchange-created proprietary products for all types of market participants, including market makers/liquidity providers, introducing brokers (IBs), futures commission merchants (FCMs), proprietary trading firms, and hedge funds, with a primary focus on public retail customers. The exchange is a registered Designated Contract Market (DCM) with the Commodity Futures Trading Commission (CFTC).

Challenge

The project’s concept originated from its founders’ desire to create an exchange focused directly on its customers. Its core objective is to bridge the futures and options product gap for all types of retail investors by providing smaller, capital-efficient products that are simple to use and easy to understand. 

To put this idea into practice, the Client required a specific technology with sophisticated reporting, risk management tools (price banding, kill switches, real-time exposure control, etc.), and consistent sub-millisecond latency for socket-to-socket FIX message processing. In order to launch, the exchange also had to be integrated with the Options Clearing Corporation, surveillance systems, and the NFA.

The exchange was set to offer cash-settled contracts based on proprietary indices with multiple constituents, so it needed a partner providing market data and with index construction, real-time maintenance, administration, and calculation services.

Scheme with exchange components

Solution

Devexperts has a long and distinguished track record of developing software solutions for the financial industry, establishing a reputation for itself as a trusted technology provider and partner.

To meet the Client’s challenge of creating an exchange from the ground up, Devexperts had a matching engine ready for deployment and numerous connectivity developments in store. Devexperts also offered dxFeed services. dxFeed is Devexpert’s subsidiary company specializing in market data delivery and services. The subsidiary had previously completed index development projects for two US exchanges, accumulating the expertise required to provide the Client with proprietary indices. The Client was well aware of Devexpert’s skills, experience, and capacity and therefore entrusted it with developing the exchange. The Client also handed over the construction of indices and market data distribution to dxFeed.

Project timeline

Development start Fall 2017
Datacenter setup Fall 2018
CFTC approval Early 2020
Soft launch Early 2020
Official exchange launch Summer 2020

Hardware

Devexperts consulted the Client on hardware selection, ensuring the exchange complies with all industry standards and their expectations. The exchange was rolled out on privately owned and operated hardware close to bare metal. The technology fully utilizes the modern hardware stack: multi-core and multi-socket CPUs and high-performance DMA network cards.

Connectivity

Devexperts implemented a trading FIX API and a drop copy FIX API for brokers and market makers. It is a clear and standard solution used across US exchanges as a best practice that provides ~100-microsecond end-to-end latency (from the moment an order is received up to the push back of an execution report). Devexperts also equipped the exchange with specially designed security measures in case connectivity is involuntarily lost.

Clearing

Devexperts integrated the exchange with the Options Clearing Corporation (OCC) through a real-time trade stream with a periodic data export. OCC provides it with a full range of clearing and risk management services.

Market data delivery

For market data delivery, Devexperts developed a proprietary, high-performance binary market data protocol over User Datagram Protocol (UDP). Market data is published in a simple binary encoding (SBE) format, prompting faster and concise data delivery. In addition to the low latency UDP, Devexperts implemented a simple Transmission Control Protocol (TCP) that is easier to consume for retail integration. This protocol was implemented upon QD, the open-source message bus Devexperts developed. This enabled integration with various pre-existing systems: market data viewers, charting, etc.

For worldwide market data distribution, the Client employed dxFeed for its redundancy setups, diverse presence points, and failproof and resilient infrastructure designed with a target uptime goal of 99.99%.

Matching engine

The exchange’s core is the Devexperts matching engine. Devexperts implemented it as a clustered, replicated state machine with the help of RAFT distributed consensus protocol. The sophisticated design relies on high-performance data structures and employs the event sourcing architectural model.

Its interconnect API is based on reliable Aeron UDP transport, and messages are based on SBE.

The Devexperts matching engine has the following functionality, which can be expanded on demand:

  • Order Types: Limit, Stop, Stop Limit, and Market
  • An anonymous FIFO (first in, first out) execution algorithm based on price-time priority
  • Time in Force: DAY, GTC, FOK, and IOC
  • Market States: Pre-open (Opening Auction), Open, Paused, Halted, and Closed
    • Opening auction has two different phases: all orders are accepted or cancels are not accepted. During the auction, books may cross and matching does not happen. Once the auction is over and equilibrium opening prices are determined, regular trading opens.
  • Risk management tools such as a firm-based kill switch, exposure limits, soft and hard price limits, configurable self-match prevention, and price banding
  • Implied Matching and Pricing: 1st level
    • Both for single and multi-leg direct orders received by market participants, the matching engine generates implied orders. It supports implied matching, meaning it shows live bids and offers in one order book by using an algorithm that relies on bids and offers from other related order books.
  • Order modification and cancellation
  • Multi-leg strategies support
  • Trade busts and corrections
  • Market summary calculation and distribution
  • Mass operations support: order cancellation and expiration
  • Support for running multiple matching engine segments to ensure the solution is able to scale horizontally with more products

The matching engine provides ~100-microsecond end-to-end latency. By the end of 2020, the exchange processed over eight million orders per day.

To top that, Devexperts set up authentication and authorization through REST API for user and group management with cluster support.

Admin application

Devexperts built an admin application available to market participants and the Client’s staff that allows them to view orders, trades, market data, risk parameters, current exposure, as well as manage day-to-day operations and parameters. The admin application is built over REST API and has an advanced permission scheme.

Data warehouse and reporting

The exchange stores all events in a central database. This design enables the Client to conduct full audits and generate sophisticated reports for regulatory compliance purposes. These reports are also used for analyzing the exchange’s operations.

Settlement

The exchange has a module responsible for settling daily and expiring futures and options contracts. It uses a complex algorithm to calculate settlement prices and allows operators to review and publish them.

Disaster recovery

Devexperts also developed a protocol for disaster recovery. The protocol covers surveillance failovers, drop copy integrations with clearing houses, real-time and batch integration with the OCC and NFA, FIX integrations with participants, and market data distribution for participants. The exchange is equipped to survive a temporary datacenter failure and even a total loss, requiring only several hours to fully recover. Devexperts tested the disaster recovery protocol and approved it with CFTC. The event sourcing architecture also contributes to business continuity planning.  

Index construction

The Client relied on dxFeed’s portfolio and contracted their services to construct proprietary indices across several industries.

Results

Devexperts and dxFeed developed the project from scratch, and it resulted in the exchange’s successful launch in 2020. By the end of 2020, it processed over eight million orders per day. Throughout the course of development, Devexperts was able to meet the following challenges:

  1. Selecting and installing hardware compliant with industry standards and the client’s expectations
  2. Connectivity via FIX APIs
  3. Integration with the Options Clearing Corporation
  4. Market data delivery via numerous protocols, including proprietary high-performance binary market data protocol
  5. Market data distribution via dxFeed’s infrastructure
  6. A matching engine implemented as a clustered, replicated state machine with the help of RAFT distributed consensus protocol. Its design relies on high-performance data structures and employs the event sourcing architectural model, contributing to security measures.
  7. Authentication and authorization through REST API for user and group management with cluster support
  8. Development of an admin application available to market participants and the Client’s staff with an advanced permission scheme
  9. Data warehousing and audit reporting, along with the ability to generate sophisticated reports for regulatory compliance purposes
  10. Configuration of a module responsible for settling daily and expiring futures and options contracts
  11. Business continuity planning
  12. Construction of proprietary indices across several industries.