Electronic Trading Today: New Requirements for an Increasingly Complex Global Marketplace

Today’s global trading landscape is vastly different than it was twenty years ago. Structural, economic and regulatory forces, combined with major advancements in trading technology, have ushered in a new era of automated trading. In the United States and Europe, numerous electronic market centers – exchanges, alternative trading systems (ATSs), electronic communication networks and multi-lateral trading facilities (ECNs and MTFs), crossing networks, etc. – compete for client order flow, promising superior execution speeds, reduced market impact, anonymity, or a combination of the three. Market regulations in the US (RegNMS) and Europe (MiFID) have hastened the pace of structural and technological change. As for Asia and other emerging markets, they are not far behind. Exchanges are modernizing, market participants are investing heavily in technology and electronic trading is on the rise.

The end result? Firms today face a challenging new market environment, one that is fractured, extremely competitive, and constantly evolving. At the same time, all market participants – buy-side firms in particular – are under increased pressure to minimize trading costs and increase operational efficiencies. “Do more with less” is the mantra for many firms, particularly in light of the recent economic downturn and new capital constraints. As such, the challenge is twofold: deploy advanced trading technology that will allow you to navigate – and exploit – today’s complex marketplace, but do so with an eye towards long term value and scalability.

What constitutes “advanced trading technology,” and what do firms really need to compete effectively in today’s market? First, traders must have access to a variety of global liquidity points – broker dealers, agency brokers, ECNs, crossing networks, exchanges, etc. – so that they can pursue best execution and price improvement by routing orders to the most appropriate market center. Unfortunately, running multiple different front ends that connect to these various destinations raises a host of workflow inefficiencies and introduces the dreaded “swivel-chair effect.” Given the range of execution destinations available to firms today and the number of brokers they use, traders could easily find themselves switching between as many as five or ten different trading platform. As such, it is critical that firms adopt systems that can access all global liquidity providers from a single system.

Second, trading systems have to be flexible, open and easy to integrate into a firms’ existing workflow infrastructure. Given the increased focus on straight-through processing and operational efficiencies, tight integration with legacy and third-party workflow applications is a must. Flexibility is also a key requirement for firms wishing to develop their own trading strategies. Trading systems have to provide an open framework for the development of proprietary algorithms and rules based strategies that can help traders achieve alpha and execute order efficiently.

Third, clients have to be able to deploy an integrated toolset that will allow them to make informed decisions about how and when they route their orders. These tools include transaction cost analysis (TCA) feeds, real-time benchmarking capabilities and post-trade analytics with which they can measure execution quality. Of course, the need to carefully monitor workflow and trading decisions is not born solely from the desire to reduce costs. The ability to analyze orders at any point during the trade lifecycle will help firms comply with new regulatory requirements that seek to ensure best execution.

Finally, companies must deploy systems that can cope with the massive increases in trading activity and messaging traffic that are rapidly becoming the norm. Recent periods of high volatility have significantly slowed, and in many cases crippled, legacy order management and single dealer execution management systems. And while things have settled down a bit, firms are contemplating a future in which such volumes will be the rule, not the exception.

The final piece of the puzzle is “long-term value” and “scalability.” While the list of requirements above may seem daunting to many firms, selecting a trading solution that can grow with your business and adapt easily to new regulatory and structural changes can be even more challenging. It is for that reason that firms are turning away from closed, inflexible systems built with legacy technology to more flexible and scalable solutions. Only trading systems that are built using industry standard technology, and which can be easily customized and configured to meet current – and future – trading requirements offer long-term value.

Technology and electronic trading have transformed the global markets. However, many participants have yet to fully realize the benefits that are available through advanced trading systems. In order to compete and remain profitable in a complex trading environment, hedge funds, institutions, brokers and banks will have to deploy solutions that meet all of their functional requirements today, while offering the kind of flexibility and scalability to support their businesses tomorrow.