FRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

FAISAL HABIB CSC 2228 PROJECT PRESENTATION DECEMBER 4, 2019

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FRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

INTRODUCTION▸ Quick Overview of Financial Instruments

▸ Problem Description

▸ FRET

▸ Compute in Cloud vs. Compute at Edge

▸ Results

▸ Conclusion

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FRET.key - December 8, 2019

FINANCIAL INSTRUMENTS▸ Stocks & Bonds

▸ Swaps, Options, Forwards, and Futures

▸ Combined in many ways to form Structured Products

▸ Capital Protection

▸ Income Enhancement

▸ Market Participation

▸ Hedging & Risk Management

FRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

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FINANCIAL INSTRUMENTSFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

Image taken from: https://www.tdstructurednotes.com/snp/noteDetails.action?noteId=2709

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FINANCIAL INSTRUMENTS▸ Options

▸ Fundamental building block for structured products

▸ Contracts that allow the holder to buy or sell an asset at a predetermined price

▸ Types:

▸ Call Option: Payoff at maturity = max(0, S - K)

▸ Put Options: Payoff at maturity = max(0, K - S)

▸ Exercise: European, American, Bermudan

FRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

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FINANCIAL INSTRUMENTSFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

80 85 90 95 100 105 110 115 120

Price

($)

Stock Price/Index Level

Call Options

Call (30 Days)

Call (60 Days)

Call (90 Days)

Call (Expiration)

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FINANCIAL INSTRUMENTSFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

80 85 90 95 100 105 110 115 120

Price

($)

Stock Price/Index Level

Put Options

Put (30 Days)

Putl (60 Days)

Putl (90 Days)

Put (Expiration)

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FINANCIAL INSTRUMENTSFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ Pricing of European Call & Puts can be determined analytically (under various assumptions)

▸ Black-Scholes-Merton (BSM) Formula:

Vcall = Se�qTN (d1)�Ke�rTN (d2)

Vput = Ke�rTN (�d2)� Se�qTN (�d1)<latexit sha1_base64="GXOwJ1Si3Ph/YbBMr0yDNaztokM=">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</latexit>

d1 =1

�pT

ln

S

K+

✓r � q +

�2

2

◆T

�

d2 = d1 � �pT

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IMPLIED VOLATILITYFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ A measure of uncertainty/fear in the market

▸ Observe prices in the market

▸ Use BSM to solve for volatility

▸ Not easy to invert the BSM formula

▸ For every K and T, solve BSM formula numerically to determine implied volatility

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IMPLIED VOLATILITYFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

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IMPLIED VOLATILITY SURFACEFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ Required input to price options correctly

▸ Not only vanilla options but also other exotic kinds

▸ Traders constantly monitor volatility (mark their vol. surface)

▸ Frequent updates when markets are changing rapidly

▸ Rely on this volatility surface to price OTC instruments

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PROBLEM DESCRIPTIONFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ Monitor the market (indices, basket of indices, stocks, etc) periodically

▸ Construct/Update (mark) the volatility surface using standard options available on the exchange

▸ Perform any post-processing of the volatility surface (institution/security dependent)

▸ Use volatility to price OTC instruments automatically

▸ Adjust bid/ask price (as appropriate based on risk capacity)

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FRET PROTOTYPE SETUPFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

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FRET PROTOTYPE SETUPFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ Google Compute Engine

▸ G1 Small (1 vCPU, 1.7 GB Memory)

▸ Ubuntu 18.04

▸ Apache 2 & Flask

▸ Edge Server

▸ VM running on Windows 7 Host

▸ Ubuntu 18.04

▸ Apache 2 & Flask

▸ Client Computer: MacBook Pro

▸ Network Connection: 25MBit Downstream / 10MBit Upstream

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COMPUTATIONS — CLOUDFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ Download data from data provider (Yahoo! Finance)

▸ Construct Volatility Surface

▸ Process client request

▸ Calculate option value

▸ Calculate option greeks (sensitivity)

▸ Send results back in json format

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COMPUTATIONS — EDGEFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ Cloud/Edge

▸ Cloud Server downloads data from data provider (Yahoo! Finance)

▸ Build the implied volatility surface

▸ Pushes to Edge Server periodically

▸ Client makes pricing request to Edge server

▸ Edge server process client request

▸ Calculate option value

▸ Calculate option greeks (sensitivity)

▸ Send results back in json format

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REQUEST & RESPONSEFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

http://35.226.6.170/price_options?payload=^GSPC_C3000D30

{"^GSPC_C3000D30": {"Value": 169.88138974993626, "Delta": 0.8140232196141809, "Gamma": 0.0014867304429613294, "Vega": 287.143372474178, "Theta": 216.82667049055874, "Rho": 282.02900716806903 } }

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LATENCY COMPARISON (S&P 500)FRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

327 533 952 1775 3459 6807 13596 27063Cloud 2.6548 2.791 2.7091 2.6559 2.9362 3.1173 3.4135 3.5967Edge 1.5754 2.0735 1.5624 1.6628 1.6774 1.8764 2.1527 2.7127

0

0.5

1

1.5

2

2.5

3

3.5

4

Tim

e (s

)

Average Round Trip Times for S&P 500 Options

▸ 25% Improvement (128 options)

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FRET.key - December 8, 2019

LATENCY COMPARISON (AAPL)FRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

▸ 46% Improvement (128 options)!

327 533 952 1775 3459 6807 13596 27063Cloud 4.2652 4.2043 4.1631 4.1953 4.3556 4.4231 4.8221 5.1224Edge 1.5152 1.4714 1.4796 1.4703 1.5928 1.7974 2.1032 2.737

0

1

2

3

4

5

6

Tim

e (s

)

Average Round Trip Time for AAPL Options

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COMPARISON AT 99TH PERCENTILEFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

0.0

0.10.2

0.3

0.40.5

0.60.7

0.80.9

1.0

3 3.5 4 4.5 5 5.5

RTT [S&P 500 CLOUD]

0.0

0.10.2

0.30.4

0.50.6

0.70.8

0.91.0

2 2.5 3 3.5 4

RTT [S&P 500 EDGE]

99th Percentile @ 4.61s 99th Percentile @ 3.48s

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EDGE ADVANTAGEFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

TEDGE = TE

REQ+ TE

PROC+ TE

FILE+ TE

PRICE+ TE

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TCLOUD = TCREQ + TC

PROC + TCFETCH + TC

PMD + TCPRICE + TC

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(TE

PROC+ TE

PRICE)� (TC

PROC+ TC

PRICE)

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(TC

REQ+ TC

FETCH+ TC

PMD+ TC

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XFER) �

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COMPARISON AT 99TH PERCENTILE — LIMITED BANDWIDTHFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

0.0

0.10.2

0.30.4

0.50.6

0.70.8

0.91.0

2 2.5 3 3.5 4

RTT [S&P 500 EDGE]

99th Percentile @ 3.48s 99th Percentile @ 24.20s

0.0

0.10.2

0.30.4

0.50.6

0.70.8

0.91.0

18 19 20 21 22 23 24 25 26 27 28

RTT [S&P 500 EDGE (BW Limited)]

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FRET.key - December 8, 2019

CONCLUSIONFRET: FOG COMPUTING FOR REALTIME EXOTIC TRADES

‣ Edge servers improve latencies

‣ Not limited by bandwidth

‣ Network Savings > Compute Costs

‣ Edge is not a drop-in replacement to cloud

‣ Additional components needed

‣ Application redesign & refactoring

‣ Well designed applications/systems can benefit:

‣ Compute intensive tasks can remain on the cloud

‣ Update edge servers (cache the data on the edge)

‣ Edge servers carry out light weight computations

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