Q&A: CME’s Blu Putnam on reconstructing the order book, rate cuts and slowdowns

By Michael McCaw | 13 August 2019

For traders, billions of data points have become available over the past few years – useful in the search for arbitrage only when the appropriate management and direction are applied to them.

The surge in big data has created an ever-growing market for data management tools, driven in large part by technology, with machine learning and artificial intelligence solutions reading everything from sentiment to event risk and other metrics. Late last year, CME unveiled its Liquidity Tool, designed to allow the firm’s market users to measure current and historic liquidity across asset classes. Heavily involved in the architecture of the tool was Blu Putnam, CME’s chief economist whose insights into financial markets and macroeconomic movements are studied far and wide. We caught up with Putnam, to discuss the Liquidity Tool, how firms are making use of data, and what’s happening at the Federal Reserve.

From an economist’s perspective, how do you use the Liquidity Tool?

It’s really useful for research, as a visualisation tool. If I’m interested in a market that is currently active, I check the liquidity in different time zones, to see how it's changing.

Power users are more likely to be traders, but I find the visualisations to be very, very helpful. I also use it around event risk periods. If I know, for instance, that some particular news is coming out, I can go in the next day and see how liquidity changed before and after.

What’s next for the CME’s Liquidity Tool?

For the past four or five years we've been moving data onto the cloud. We're talking about really big data, because we're reconstructing the order book, nanosecond by nanosecond. On the S&P E-mini contract alone, on an average day, you'll get two billion messages that change things. It’s a huge amount of data. The Liquidity Tool was our first visual realisation that we could really work with this data, and the cloud providers offer excellent machine learning and other kinds of tools so we've now built up our own expertise on how to leverage both the tools and the data. We're probably going to give a little more granularity in about a year. Right now it’s in time zones, but we’re looking into that. We've already extended into a variety of products, and we're going to be looking into various kinds of things we can do with options.

How complex do you think data management is getting?

It's getting incredibly complex. Users are finding out incredibly quickly where the pitfalls are, because one of the things that we certainly have learned, and I know from my peer group and other companies, is you can't let a data science person loose without a reasonable degree of product knowledge.

We've instituted a lot of product training for our new data science people to help ground them in the markets so they can pick the tools they need. But I know that's an issue across the board in a lot of different industries.

You spoke recently about a lack of global growth expected in the months ahead. How bearish are you feeling, and what does your reading of recent data trends tell you?

I believe that growth is slowing down, that makes me a little bit bearish. But I am not looking for a recession in the US. I'm not looking for a disaster in China. You know, I'm just looking for global trade to slow a little bit and global growth to slow little bit. But to me, it's nothing like what normally triggers a recession. Usually with a recession you have a build-up of some kind of excess, usually in one part of the debt market or another, then you have the Fed later in the business cycle starting to raise interest rates; interest rates punctures the debt and then there’s a recession.

It can be caused by housing, the savings and loan crisis, hedge funds, but, this time it's a trade war. The US is a pretty robust economy. Exports and imports matter, but they're not the be all and end all.

It’s nothing as serious as the debt crisis and the Fed’s just cut rates. And they're already really low. The last time we were in a recession rates were at five or six percent. Before that they were even higher. So two percent rates is not going to be a problem, given that inflation is about two percent. There's really no issue with the interest rates.

The trade war is what is slowing things down. And if you look at US data, what’s really slowed down is business investment. Consumers are fine: people still have jobs, unemployment is slow. They’re spending 75 percent of the economy. But business investment has definitely slowed because companies don't know what to do with their supply chain, their demand profiles are shifting, particularly multinational companies. So they just pull back and they're rethinking things.

What are your thoughts on the Fed’s rate cuts? Markets seemed to react with uncertainty over the possibility there would be more cuts…

The Fed has really backed itself into a corner. They’re not united on what they want to do going forward. It’s highly unusual for one person to dissent and really very unusual for two to do so. Both the Federal Reserve Bank of Boston and the Kansas City presidents dissented. It's been a much stronger message that this Fed doesn't have a consensus about what to do.

If you look at current data then the Fed shouldn’t have done anything. If you factor in the trade war, and you see the global situation slowing then you can definitely do one cut, maybe two. But I don't even think we should have done that.

There's a lot of economists - and I'm in this group - feel that the problem with the economy is the trade war. It's not interest rates. So if you're slowing your business development plans, because you don't know where to put your next factory and you don't know where to allocate money for your supply chain, interest rates are not important to you. It doesn't matter if they’re at zero, one or two, you’ve got to figure it out before you even think about how to fund it. Jerome Powell made a statement that an ounce of prevention is worth a pound of cure, but that's only true if you're getting the right medicine and with interest rate cuts, you're not getting the right medicine.

For me the Fed is wasting its ammunition: when or if we have a problem with debt, it's not going to have that much ammunition.

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