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CME Group Picks StreamBase’s CEP Platform for Options Pricing

Derivatives exchange initially will tap the complex event processing platform to develop models for settlement pricing of options on futures with plans to expand CEP's use into risk management and compliance.

As part of an enterprisewide deployment, Chicago-based global derivatives exchange operator CME Group has licensed StreamBase Systems' complex event processing (CEP) platform to generate settlement prices for options products. StreamBase announced the deal today at the SIFMA Technology Management Conference.

Seeking improved time to market and the increased flexibility to change pricing models, CME said the ease of use of StreamBase's development environment set it apart from the various CEP platforms in the market. The evaluation of available CEP solutions occurred over the past four to five months and the contract was signed in the April/May timeframe, according to CME.

"As we move to expand our electronic trading opportunities and extend the business into new products, one of the interesting challenges is how to get the industry the most accurate settlement price," says Steven Goldman, managing director, enterprise architecture, CME Group, in an exclusive interview with <em>Wall Street & Technology</em>.

Currently settlement price generation is very manpower-intensive, and it can be somewhat difficult for the settlement team to develop new approaches to settlement prices, according to Goldman. "There a lot of spreadsheets going around," he adds.

CME initially will utilize the CEP platform to handle high volumes of streaming data and develop pricing applications for options in the settlement area, Goldman reports, noting that the derivatives exchange will utilize its own market data, feeds from CQG and other sources of market data. "We expect it to be a fairly big effort," he relates. "Any time you deal with market data -- we have fire hoses of market data -- this is going to be a significant infrastructure."

Commenting on the deal, Andy Nybo, principal and head of TABB Group's derivatives practice, notes that StreamBase "[touts itself] as very capable of handling a high volume of data feeds and information processing very quickly."

While speed and throughput were definitely factors in the selection of StreamBase, CME's Goldman acknowledges, he reiterates that usability of the vendor's development environment was the differentiating factor.

According to Goldman, CME Group will deploy StreamBase in the market operations and customer service area known as the Globex Control Center, where settlement occurs for all CME Group business, including derivatives, futures, options and over-the-counter instruments. He explains that CME's settlement team will use the CEP tools to handle quote feeds from various vendors and calculate the options prices via models such as Black-Scholes -- all in real time.

"You need to be up to speed on what the best approach to settlement pricing is as the world changes," Goldman says. "There are new models that change the dynamic, so our settlement capability needs to change with the economic world. [CEP] is really improving the capability and accuracy of settlement prices."

TABB's Nybo says CEP's modular development environment should give CME the flexibility to price unique products, ranging from interest-rate futures and cattle futures to grain futures. "As you price options on futures, and as you integrate data feeds, being able to quickly and easily manipulate the parameters and the assumptions and models -- especially unique instruments underlying the options themselves -- becomes important," he explains. "The models that you use to evaluate those options and the underlying instruments frankly are very subjective. So the ability to tweak the model and to account for unique product sets is very important for determining the settlement price or the evaluation of those instruments."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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