Hard Choices Ahead for Trading Platforms

While it is too early to project a timetable for recovery from the greatest financial crisis since the Great Depression, there is some convergence of opinion on the key underlying causes and what a new, stabilized financial system in general, and securities trading in particular, may look like. That was clear from the responses gleaned from an informal Sybase/Financial Times poll taken at the FT Electric Money Conference: Liquidity in Crisis, held earlier this month in New York City. According to a majority of those surveyed, excesses in the securitization industry coupled with a failure of valuation practices and risk management were among the leading causes of the global financial crisis. That’s the bad news. The good news, if it can be called that, is that half of those polled believe that the crisis, while far-reaching in scope, can be fixed through the kinds of government intervention and bailout programs that are being implemented. Still, nearly four out of 10 of those surveyed, roughly 38%, believe that the financial industry, while structurally sound, will also require adjustments to regulatory and accounting practices to return to an even keel. And therein lay one of the many paradoxes we face at this extraordinary juncture. Notably, 53% of the survey’s respondents see a long-term challenge in trying to formulate regulations that can keep up with while also retaining the dynamic, innovative nature of Wall Street.

That culture of innovation is playing out with unprecedented intensity in today’s high-performance trading environments as alternative trading platforms and venues emerge to challenge the market position of traditional exchanges. There is no question that greater oversight and innovation, at least for a transitional period, will shape the post-crisis trading community. Along the way, there are numerous hard choices ahead for trading platforms if they wish to remain competitive. The impact of off-exchange trading, private markets and dark pools as well as issues that affect pricing discovery and dissemination and other elements all raise substantial challenges for the new generation of exchanges as they set out to differentiate themselves.

Setting aside the anticipated consolidation among niche and agency brokers – and some consolidation is inevitable – what are the primary ingredients of differentiation? What roles do speed, latency and integration of the stack across the front and middle office play? Even if a global financial crisis had not occurred, traders must contend with a stream of new data that is growing in complexity, frequency and speed on a daily basis. At the same time, they have to find ways to store this torrent of data while maintaining accessibility for a wide range of users, in as close to real time as possible. In order to attract order flow and build out competitive services, the new venues must be able to offer a technology platform that provides an alternative to the fragmented, silo-based, infrastructures that institutions are rapidly outgrowing.

From such a client’s perspective, availability of actionable information, hence managing the data flows, is a critical competency in choosing from available platforms. For example, a unit of a financial company that does cross-asset or portfolio trading needs near-instantaneous data from a variety of data sources, transparency to market activity on each asset class, as well as the ability to track liquidity and volatility profiles and depth of the order book. Low latency, accessibility and extensibility, therefore, are imperatives for anyone building or re-thinking an infrastructure today. Both the traditional exchanges and new entrants are increasingly re-defining their roles as technology platform providers and are incorporating new technologies such as complex event processing, hardware acceleration technologies and re-writing software optimized for multi-core processors at a faster pace than ever before. Managing both high-frequency, high-volume in-bound data, supporting real-time decisioning and managing derived data and the workflow required to support managerial oversight and risk management, effectively all constitute the cornerstone of a competitive infrastructure.

So far, most Alternative Trading Systems and Multilateral Trading Facilities are focusing on next-generation order management and execution systems and emphasizing their competencies in access to liquidity and execution capability. There may not be sufficient differentiation on pure technology to accommodate all new entrants on the execution side. Over time, competitive advantage will accrue to those who build economies of scale and scope rapidly and to those who build up their portfolio of innovative information and analytical products. This may also be a path for the revival of the traditional exchanges.

Given the certainty of a new regulatory regime in the coming year, IT departments are in the crosshairs as they give renewed consideration to outsourcing the design of event processing applications to third-party vendors. With resources and budgets under more pressure than anything experienced in recent memory, the next generation of viable new information management strategies will require a visionary perspective. The solution will be found not only in being prepared to meet the complex challenges we can foresee, but in anticipating those value–added services for which secular demand has yet to materialize.