With the goal of gaining increased liquidity in the existing weather derivatives market, Swiss Re (Zurich) has contracted with Longitude (New York) for the use of its Parimutuel Digital Call Auction (PDCA).
According to Frank Caifa, associate director, weather trading, Swiss Re, PDCA will allow for a more efficient matching of bids and offers, thus narrowing bids/asks spreads, which currently can be as wide as $300,000 to $500,000. Such spreads may appear astronomical as compared to spreads in other derivatives markets, Caifa points out, so investors not familiar with the weather derivatives market may be dissuaded from trading.
"The PDCA platform should be able to narrow these spreads to around $150,000 to $300,000," projects Caifa. The narrowing of spreads, he says, will accelerate closures and increase the volume of transactions that are completed in the market. "The technology will allow for the most efficient means of matching all of the disparate orders." Traders, explains Caifa, do not need to have access to the PDCA technology. "They will be sending in their bids and asks, and Swiss Re will take these orders and put them into the Longitude system."