Five Minutes with Russ Chrusciel
Russ Chrusciel is the head of product management for SunGard’s Valdi Options Solutions. He recently participated in a panel at the Securities Traders Association of Chicago (STAC) conference on “Derivative Technologies Challenges.” Later at the conference he spoke with JLN Options editor Sarah Rudolph about SunGard’s option analytics tool, the challenges in providing support to clients, the impact of regulations, and trading strategies.
Q: Can you explain what the Valdi Options Solution is and how it works?
A: Valdi Options Solutions is a division of SunGard Capital Markets. We offer software solutions that serve the needs of options traders and risk managers with respect to options risk management both in a pre-trade, evaluative phase, and on a post trade basis.
We work with customers to provide tools to help them navigate the derivatives markets on a day-to-day basis. One of our core products was formerly known as Microhedge, and has been rebranded as Valdi Options Solutions. People who have been around options trading for the past 15-25 years know the product. In addition to Valdi Risk Analytics, we also have a solution geared toward options portfolio risk management which is called Valdi Enterprise Risk Manager – ERM for short.
Q: As far as options analytics, what sort of tools does it provide?
A: We work with market data providers and we show real time markets across the spectrum of the listed space. We allow users to use their own model inputs in respect to underlying price, time, interest rates, dividend streams, customized volatility skews and surfaces, which lead people to generate theoretical values across a subset of listed options.
In some cases we work in tandem with execution partners, so if I have a valuation on an option and want to take action, I can send that order off to be executed.
Finally, we provide service in the areas of position servers or position management, where those executed fills go back through an option clearing firm to our position database where the users can see the sum total of their positions. So they can see where their risk is and where the options Greeks are, as well as looking at day to day market P&L and theoretical P&L.
Q: On the panel, people talked a bit about the challenges in supporting clients. Who are your clients and what are the challenges?
A: Our core client base has been and continues to be proprietary traders. As the market evolves and expands, we also address anyone dealing with the listed options market, such as traders, risk managers, anyone doing an evaluation.
The problem of managing market data is big and continues to get bigger. Traders are constantly looking for intelligent ways for market vendors like ourselves to give them solutions to manage data more effectively. The panel at STAC touched on the fact that the user base is getting more segmented and fragmented than a couple of years ago. Back in the day you had floor based market makers and their needs were homogenous. Now, you have pseudo-high-frequency types getting in and out of options frequently, versus position traders who hold on for a week or two. The market data needs of those two users are different.
Latency is key, throughput is important, but for the position trader, the faster the better. For the position trader, although time is important it is not of the bottom line essence. A 250-millisecond intentional latency is more than acceptable and their needs can be met that way.
We are seeing even within the derivatives space the fundamental needs of different user profiles further segmenting.
We are also seeing the evolution of algorithms and intelligent trading in the options space. Although algos are very entrenched within equities, in options they are a bit more fluid. The definition of what is an algo is a bit more open for debate. There is certainly a much higher level of complexity with options because their price is based off something else. With options, you have the underlying price and volatility as well as other variables in the mix, so it’s tougher to design an algorithm. Those types of issues will shape our user base and also options and derivatives as a whole.
Q: Your clients are mostly proprietary traders. The panel talked a little bit about the Dodd-Frank legislation. Will you be impacted?
A: Indirectly we are. Across SunGard there are different divisions, including some that have more sell-side or broker-dealer involvement. As far as working with those users and anticipating their needs, right now there is thankfully nothing overarching. Over time, though, I see derivative compliance being ratcheted up. The macro trend right now is toward more regulation and more documentation than there has ever been.
Q: What are some of the strategies that your customers are particularly interested in? Are they trading weekly options?
A: Yes, they are. Any time a seasoned options trader can take advantage of the near-term decay of an option in a strategic way, they will certainly do so. We have also seen the rise of spreads in the complex order book. Over time, as the electronic trading of options has come to fruition, there have been greater efficiencies. Now, at least in the top 100 or 50 listed names, the market is probably not more than a penny or two wide – because the scrutiny on those liquid names has really come together.
Q: You mentioned on the panel that there have been huge changes in the market. Which changes are currently affecting you the most?
A: Part of it is the collective unknown. If some of the regulatory uncertainty were to be firmed up, it would free firms to pursue certain technology and risk management investments they may have been putting off.
Q: You always hear the number one concern is reducing latency, but what is the second biggest concern?
A: From my vantage point, some of the next areas to address are market access and trading expenses.
I believe there are many small professional firms and high-end retail traders in the U.S who would like to do more trading in overseas markets – if they can do so at a reasonable price. That is, a trading firm might very well see significant opportunities to trade in markets like Brazil, Hong Kong and others. However, the firm then has some key decisions to make: will the firm run its own lines to these markets or use others? How will their execution and clearing relationship look in these markets? And will their current systems support far-reaching trading activities?
There is a baseline capital requirement to get involved in some markets on a consistent basis. Given this reality, it’s our job to work in partnership with our customers to address their needs for market access, and help them minimize trading expenses.
Q: Are you saying that the smaller firms don’t have the capital to do this?
A: Not that they don’t have the capital, but it has to be well thought out and you have to commit to it fully.
Q: You said it is sometimes difficult to get people to hedge with various derivatives products because there is not a huge profit involved. How do you address that problem?
A: I think we have to create every reasonable incentive to engage those markets. You’ve seen everything from rebates to payment for order flow, different market models. Those potentially might have to be ramped up. Human nature is to do that which we are incentivized to do. If you want to get people interested, you have to create financial or other incentives to do so. There is a constant evolution in trading instruments – maybe we need twice as many instruments, or weeklys that no one has thought of yet. Or maybe we need to shut down the instruments that have minimal volume.
I think the industry is on a good track, but if it really wants to continue to launch itself in the world it’s going to have to take some mini gambles in that area. He who takes that gamble and succeeds will benefit accordingly.
Q: Do your clients trade a lot of volatility products?
A: Yes, primarily the VIX futures and options. I’ll be curious to see what class of product evolves that isn’t even around today, that’s a figment in the back of some PhD’s mind right now. Imagine if 20 years ago someone had said that Google would have the second largest market cap in the world! I feel similarly that ten years from now, there will be a product that will be number three in the overall list which might not even exist right now. I feel more strongly about that now than 2 or 3 years ago because the needs of the market are changing so rapidly. Volatility as an asset class certainly has relevance, but any time there is a new listed product like that that gets serious traction, there is a lot of intrigue. People are furiously trying to put their brains together to crank out something new.