Is Open Source Threatening the Status Quo?

A new software upstart Marketcetera contends that its open source platform for building automated trading systems is an alternative to the likes of EMS providers Portware and Flextrade. Marketcetera's CEO Graham Miller (who previously worked at hedge funds where he developed automated trading systems) regards these platforms as proprietary and calls them restrictive and inflexible as well as expensive.Buy-side firms, mainly hedge funds and proprietary trading shops, are participating in Marketcetera's open source effort to develop an algorithmic trading platform. By using open source development the buy-side firms can download a copy of the source code, offer feedback and receive bug reports. They can also have more influence over how the software evolves.

I doubt that the emergence of an open-source trading platform is going to encroach upon the success of Portware and FlexTrade anytime soon, but it could offer firms more freedom to do things on their own at a lower price point.

I think the rise of an open-source computing platform for developing algorithmic trading and other automated trading strategies is a cool idea especially for hedge funds that are developing multiple strategies and want to code quickly and want the flexibility to change things without waiting for a software company to do it for them. It's also something that could be controlled by the buy-side as opposed to the sell-side since so many of the EMSs these days are operated by broker dealers.

However, I question whether open source automated trading is for everyone. One of the reasons buy and sell-side firms go to Flextrade and Portware is to get all the pre-built functionality, connectivity, stability, reliability and battle-tested infrastructure, plus the 24-hour a day customer service and global support.

"Certain firms will want less development and out of the box solutions," comments Sang Lee, managing director of Aite Group, who hadn't heard of Marketcetera yet but was commenting generally on the potential for open source taking off.

Lee says he's not surprised to see it because the knowledge base is out there. But he thinks this has a limited target market. "You may be trading billions a year. How do you justify using a small open source vendor? Are you meeting your fiduciary duties? That's just added risk. It's just eas(ier) to go with Flextrade," he says.

I agree with Lee. Open source is not for everyone but it is for certain segments of the trading community. The open-source method could appeal to tech-savvy quant trading shops who keep their strategies a secret but who enjoy interacting with other developers and want to influence the final product.

Let's not be naïve about the trend. There are open source tools for electronic trading that are available via the Internet and they are playing a greater role in the financial markets than people realize. Several years ago, Marketcetera's CEO says he surveyed the industry and found Quick FIX, an implementation of the FIX Protocol and Quant Lib, which provides some pricing and risk analytics and general tools for quantitative finance.

But he was looking for something "further up the stack - more analogous to an applications server on the e-commerce side. That led him to build Marketcetera's trading platform on top of other open source projects. Lee knows of a high-frequency trading shop that has developed a complex event processing (CEP) system with freeware and they developed other applications around it. Two weeks ago, at Wall Street & Technology's Accelerating Wall Street conference, Marc Adler, SVP Equities and head of complex event processing, noted that "Espera is an open source, pseudo CEP technology open to the markets." [For more on Espera, Check out Adler's Magma Systems blog..

While it's easy to dismiss such notions, remember Linus Torvald -the Finnish creator of Linux who completed the operating system with contributions from the global community of software developers.

As Linux evolved, it threatened the likes of Microsoft Windows and Sun's Unix (Solaris). Well now every major Wall Street brokerage firm and exchange is running Linux - though they may have bought a software license from Red Hat. [Most recently, NYSE Euronext migrated its electronic trading to Linux under a deal with open source vendor Red Hat.] I'd like to learn more about open source projects in automated trading and quantitative finance, so that I could share this with our readers. If you know of any other interesting open source projects, let me know.I doubt that the emergence of an open-source trading platform is going to encroach upon the success of Portware and Flextrade anytime soon, but it could offer firms more freedom to do things on their own at a lower price point. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio