Late in May, Mark Palmer, CEO of StreamBase, piqued the event processing community’s curiosity with this tweet: “Today I signed what I think is the most exciting CEP deal of 2009 – corporate selection by a household name…”.
While many household names use Complex Event Processing products, the products are acquired solve a particular business problem, or perhaps, a handful of scenarios within a business unit. In his tweet, Mark signaled an adoption pattern shift, from CEP as application enabler, to CEP as enterprise technology platform.
For the event processing community — vendors, researchers, early adopters and advocates — this shift has been long overdue. Of course, as a fact based community, we require a little more information than a 140-character tweet.
“StreamBase today announced that CME Group, the world’s largest and most diverse derivatives exchange, has selected StreamBase Complex Event processing solution for enterprise-wide deployment. After a comprehensive evaluation, CME Group chose StreamBase as its internal standard Complex Event Processing (CEP) platform, and will be initially deploying it for their options pricing applications.
“CME Group is one of the most demanding technology environments in the world, processing millions of orders a day in milliseconds, and disseminating market data in a reliable and low latency manner is critical to our customers,” said Steve Goldman, Director, Enterprise Architecture, CME Group. “Their high-performance multi-threaded server and easy to use modeling tools met our requirements and will enable the exchange to quickly react to the ever changing needs of our customers.”
…As an international marketplace, CME Group brings buyers and sellers together on the CME Globex electronic trading platform and on trading floors in Chicago and New York. By acting as the buyer to every seller and the seller to every buyer, CME Clearing virtually eliminates counterparty credit risk. CME Group offers the widest range of benchmark products available across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities, metals, and alternative investment products such as weather and real estate. More information can be found at www.cmegroup.com or via Twitter @cmegroup.”
Earlier this month, I had the opportunity to speak with Steve Goldman, Director of Enterprise Architecture at the CME Group, about event processing at the CME Group and their selection of StreamBase. We had a great conversation that substantiated Mark’s proclamation “of the most exciting CEP deal of 2009”.
One administrative note before I jump into the highlights from our conversation. What follows are an edited and summarized version of my notes from the call. In other words, these are not direct quotes.
The CME Group’s first StreamBase use case is generating options settlement prices. The daily settlement process involves complicated calculations based on a number of market data feeds. For an idea of the complexity and product line variations, here are some details from the CME’s Daily Settlement Procedures (pdf):
“Equity Options: Exchange staff identifies “seed strikes” that include the at-the-money straddle and several out-of-the-money calls/puts. The midpoints of the bid/ask quotes in the seed strikes on Globex are used to create an implied volatility skew. The skew is adjusted based upon the underlying settlement price to automatically generate the out-of-the money settlement prices, and the in-the-money options are settled automatically, using the method referenced on page 4 of this document. For longer dated options for which no Globex data exists, market participants provide bid/ask data for the seed strikes. Adjustments may be made to incorporate relevant pit data.
Non-Treasury Interest Rate Options: Similar to the procedure used in equity options, settlements in the front year of expirations are generated based on the skew derived from taking the midpoint of the bid/ask quotes in Exchange-designated seed strikes from the pit and from Globex. The skew is adjusted based upon the underlying settlement price. The additional guidelines referenced on page 3 of this document are also utilized. All other contract months are settled by Exchange officials based upon input from market participants.
Agricultural Options: Market participants provide quotes in Exchange-designated seed strikes which are used to generate the implied volatility skew and the skew is adjusted to the underlying futures settlement price. Dairy products are settled using a flat volatility determined by the at-the-money straddle.
Weather Options: Option trades are converted to “standard deviations” using a model based on Stephen Jewson’s model for pricing Weather. This standard deviation creates prices in the entire options series which is then applied to the open strikes.
Housing Futures and Options: The futures are settled to the last trade or better bid/offer on Globex. Absent a trade or better bid/offer, the prior day settlement is used. The options are settled using volatility skews derived from the midpoints of the bid/ask in a given strike, tied to a futures level.
Metal Options: Exchange officials, in consultation with market participants, establish the at-the-money volatility and create the volatility surface for the out-of-the money puts and calls for all option series based on traded/quoted outrights and spreads, which is entered into an options pricing model to determine the settlements for all strikes. Settlements may be adjusted in accommodate relevant orders.”
[For more on the CME Group’s business, see Mark Palmer’s Innovation by the Numbers post.]
Goldman shared that the exchange has been an event-driven organization for a long time, at least since they began electronic trading. Goldman described CEP as the epitome. CEP introduces an engine to process thousands and thousand of real-time events, with a simple way to instruct the engine on what to do with those events.
Goldman emphasized the productivity benefits for business users. Business users will be able to build, dynamically change and test models. Once the business scenario is resolved, the business hands off the models to technology personnel who focus on implementation aspects, such as scale, reliability and monitoring.
[Weather Options Settlement Example in StreamBase, Click on Picture to enlarge]
By adding StreamBase, they now have a powerful and fle
xible tool to work with market data. To maximize this flexibility, the solution is being architected to receive all market data within the exchange, as well as many external data sources.
Future use cases include real-time risk analysis and the margining aspect of the business.
In respect to the selection process, Goldman spoke of mature enterprise architecture practices and deep business participation. They started by developing an enterprise architecture framework that looked into the entire settlement process. This resulted in a design, which ultimately led to Complex Event Processing.
Goldman outlined an evaluation process that continually narrows the field via introductory briefings, RFI responses, follow-on meetings, proof-of-concepts, gap analysis, and business terms. During the CEP evaluation, the CME Group looked at four vendors, and ended with two finalists.
The team determined that both finalists could do the job, meeting functional, performance, scale and monitoring requirements. Ultimately, the usability of the StreamBase Studio won the day.
The product’s ease of use, Goldman believes, also contributed to the business team’s deep engagement in the proof-of-concept and involvement in the final decision-making.
Return on Investment
Goldman projects the CEP engine investment will pay-off in less than a year. The alternative to purchasing a CEP engine was a custom solution. A custom solution would have required more development time and delayed the introduction of business capability, which the CME Group needs now.
In addition, a custom solution would have included manual processing and “taped together” third party tools. Besides cost and time, this path introduces more opportunities for error.
Speaking to opportunities outside of capital markets, Goldman spoke of the importance of real-time business in an increasingly real-time world. The ability to see and process orders, data, risk and regulatory compliance in real-time ultimately results in more business. More business results in more profits, now.
[Disclosure: StreamBase is not a client of my company, Elemental Links. Nor do I have the skill to trade on the CME Group’s exchanges.]