Fast, Smart and Integrated – The New Trading Ideal

By Theo Hildyard , Software AG

Life cannot be easy for those in the low latency trading game right now. In recent months we have seen a marked increase in the scrutiny of high frequency trading by regulators, politicians, the media and even law enforcement agencies.

Regardless of the outcome of all of this, the fact is that firms relying on pure speed to gain an advantage are suffering from diminishing returns. Many HFT strategies that were consistently profitable just a couple of years ago are no longer viable, as more and more competitors enter the marketplace and the cost of the technology and infrastructure required to maintain these fractional speed advantages spirals ever upwards.

The net result of all this is that many trading firms are now shifting their focus away from raw speed and more towards how they can do things smarter. How can they beat their competitors in finding untapped profitable trading opportunities? How can they leverage technology (something that these firms are traditionally very good at) in order to gain and maintain an edge?
One approach is to look at plays that encompass more variables, such as cross-asset or multi-instrument strategies. Another approach is to move away from pure arbitrage towards more statistical arbitrage, where speed is important but it is not the overriding factor.

Theo Hildyard, Software AG

Theo Hildyard, Software AG

Each of these alternative approaches relies on the ability of firms to take in large amounts of data from a variety of sources, transport it from A to B very quickly, apply lots of real-time number-crunching, and do all of this at scale. And it is important to remember that the need to be fast does not go away, because wherever markets operate on a price/time matching priority, speed will always be a major consideration. But the key question is how to be fast AND smart?

The answer lies in a combination of low-latency messaging, in-memory data management and streaming analytics or CEP (complex event processing). None of these elements are new, of course. For some time now there have been a range of tools on the market to perform one or the other of these functions. But smart trading requires all three of these elements to be tightly integrated. And if firms try to do it all themselves, this kind of integration can present them with a significant headache.

The way to address the challenge is by deploying pre-integrated tools that perform all of the above functions while still allowing infinite customisation, so that firms can develop their own functionality, create their own intellectual property and use their resources to gain a competitive edge through intelligent use of technology, without having to build everything from scratch or figuring out how to link together disparate platforms.

It is not just the buy-side and proprietary trading firms who can benefit from this approach. The sell-side can also offer more value to customers by adopting this kind of integrated technology, particularly in areas such as pre-trade risk, real-time margining and collateral optimisation.

By bringing in more of the processes that would traditionally be performed post-trade into a pre-trade environment, banks and brokers can not only gain more visibility into their true market and counterparty risk in real time, they can also offer a range of benefits to their customers in terms of how margin is utilised. For example, they could enable clients to make more efficient use of collateral through margin offsets whereby if a client enters an order for instrument A, that could potentially be partially offset against an existing open position in instrument B. The key point here is that with the right tools, rather than taking hours or minutes, these calculations can now be run in fractions of seconds.

This is true cross-asset class collateral optimisation on the fly, made possible by the ability to analyse all of this information in real time. And clients obviously really like it because it saves them money; there can be a huge cost to them in having money unnecessarily tied up in margin and collateral.

In summary, trading is getting smarter and a different set of tools are required than those needed for pure speed. Although there are a range of tools available on the market for doing specific things, fims can face an integration headache when tryingto glue together different things from different vendors. Fortunately, there are a small number of vendors who can take that headache away by offering best of breed products that are tightly integrated together.

Using an integrated suite of CEP, big/fast memory and universal low-latency messaging opens up a world of opportunities, for trading firms, the buy-side and the sell-side.
Fast, smart and integrated. This is the direction that the market is heading.

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