Abstract
The objective of this paper is to provide an overview of indices, index calculations and challenges in designing an index calculation engine. Financial indices are numbers that measure the change in price movements of stocks, bonds and other forms of investments, and are meant to capture the overall behavior of a market. Indices are used as performance benchmarks, proxies of market behavior and as the basis for certain instrument classes. Indices are used by a wide array of users that includes Fund Managers, Brokers, and General public.

An index can be constructed in three main different ways. These are Simple Average, Price-weighted, and Market-Capitalization weighted. Leading indices across the world follow one of the above-mentioned methods, sometimes with subtle variations.

Index maintenance is a time consuming process. It includes monitoring and completing the adjustments for corporate actions on an index value.

An Index Calculation Engine (ICE) performs the complex logic of deriving and maintaining an index (indices). It uses market data, reference data and business rules built within itself. It publishes the index values at periodic intervals to the external world. The users of Index Calculation engine include data vendors and index providers.

The challenges involved in designing an ICE are manifold. The sheer number of indices across the markets and the need to customize and create new indices all the time warrants a modular and flexible approach in design. Calculation intervals have reduced from 60 seconds to 15 seconds these days. Global trading and market integration mean that cross-currency normalization and time zone factoring need to be done in the optimal fashion.

The importance of data quality and management can never be over emphasized. Cross-validating multiple vendor feeds, checking for bad prices & large price movements, and threshold checking on Foreign Exchange rates are some of the validations that need to be performed. Professionals in the competitive world of investments are continuously demanding the ability to customize index engines, so that they can delve deep and analyze specific markets and sectors. Flexibility in terms of publishing the index is also desirable.

Authors Barath Narayanan Rajeev Mukundan Rohan Dedhia

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