Regulations Pressure Trading System Performance

Terry Flanagan

Challenged by the growing cost and complexity of running high-performance trading infrastructures, new regulations and the pressure to manage the operational risk of potential systems outages are requiring financial organizations to have real-time end-to-end monitoring and management of systems performance in place to maintain service quality in terms of speed, capacity and reliability.

The importance of quickly identifying and responding to problems—internal and external to an enterprise—is greater than ever.

“One of the interesting developments that we’ve observed over the last year is that as a result of regulations, more and more people are interested in understanding the entire front to back process, including post-trade,” said Kevin Covington, chief executive of ITRS Group, a provider of software for monitoring trading applications and infrastructure.

“The reality is that people are under greater pressure to know how each part of the business is performing at any point in time,” he said. “As a result, a lot of risk management techniques that were developed for the front office are being deployed across the entire trade lifecycle.”

Among the many regulatory changes that have affected financial markets is decimalization, which has resulted in tighter bid/offer spreads but has also led to greater fragmentation, with alternative trading systems and crossing networks vying with each other and with the public exchanges for liquidity.

“The function of capital formation and capital allocation in equity markets has been seriously jeopardized in the post Reg-NMS decimalized world,” said Joseph Saluzzi, partner and co-founder of Themis Trading, an independent agency broker-dealer, in a blog posting. “This collapse has been caused by the loss of economics for market makers due to the market structure changes of the past 15 years.”

At a Securities and Exchange Commission roundtable on decimalization held earlier this year, Jeffrey Solomon, chief executive of broker-dealer Cowen and Company, recommended that the SEC initiate a pilot program that widens the bid/offer spreads for smaller capitalization stocks in order to ensure that emerging growth companies find the necessary trading liquidity to return to the equity capital markets.

“Decimalization has significantly reduced the economic incentive for Wall Street firms to support trading in small capitalization stocks,” said Solomon. As a result, over the past decade, there has been a significant decline in research provided on these companies.”

Saluzzi of Themis Trading expects that the SEC will approve a pilot program for wider ticks on small cap stocks.

“We hope they also include a minimum price improvement requirement for dark pools that trade these pilot stocks,” he said. “We would recommend a middle of the spread requirement for dark pool trades.”

Saluzzi also said that the SEC will not approve a sub-penny tick size pilot program and will not lift the ban on locked and crossed markets.

“While this pilot program for wider ticks is a good start, the SEC has much more work to do to start repairing our broken markets,” he said. “Elimination of the maker/taker model, dark pool regulations, order type reform and restricting some data feed information are just a few things they will need to address.”

ITRS’s Geneos provides real-time system monitoring and application performance metrics for application infrastructures of financial institutions, including back-office operations, transaction processes and external trade execution environments.

It does this by deploying non-intrusive software agents to gather the necessary real-time data on processing and infrastructure environments for trading and risk management.

“The objective is gaining as much insight as possible into the performance of the business as trades flow through the technology stack,” said Covington at ITRS.

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