There has been a bit of a buzz recently on technology innovation in the finance industry. I’ve read articles that cut across a number of topical areas from quantitative analytics, real-time TCA, risk and compliance to general networking. Paul Rowady from the TABB Group sums it up best saying: “There is a history of front-office innovation that places stress on back-office processing”. I completely agree that it is the front-office that has sparked the arms race between investment firms and has inspired the innovations that have occurred across the finance sector.
Those innovations have been across a broad spectrum, Larry TABB reflects on a number of them in his recent article on Financial Innovations dating back to the mid-90’s, which include algo trading, pre/post-trade transaction cost analysis and high frequency trading among a host of others. These are requirements all driven by demands of the front-office as they race to compete head-on in the never-ending duel on the (virtual) trading floor.
If I were to sum up the two most important underlying aspects behind the front-office demands it would be:
- Extreme Performance
Extreme performance is measured in a) Throughput and b) Latency. The latency characteristics of a trading platform in today’s world are measured in microseconds. From receipt of a tick to executing some algo logic to placing an Order. Even Intel recognized the ever increasing performance demands with the release last year of their Nehalem (Xeon 5500) processor architecture. This high speed multi-core processor was the direct result of the need for speed in Capital Markets. Many platform vendors have quickly realized that the ante to the game changed almost overnight. The leap from millisecond to microsecond latency was an order of magnitude in difference. Re-tooling for multi-threading was required to achieve the demanding throughput and latency requirements.
Data is the essence of the Trading Life Cycle. In the search for alpha in quantitative analysis, historical data is at the heart of the hunt. Deployed trading systems reply on data for volume curves, re-pricing logic, yesterday’s closing prices, etc. Transaction cost analysis leverage captured trade history for optimizing trading costs across multiple destinations, time periods and strategies. Trade and Quote data is streamed through strategies for backtesting and to optimize their runtime parameters.
Michael Mackenzie in his article summed it up quite well: “The rise of ‘quants’ in trading leads to a greater appreciation of data“. Quants have quietly acknowledged the value of data and leveraged it to tease out countless actionable strategies. They’ve known for some time the value of historical data, whether that’s the last 3 months or the last 5 years. It provides a proving ground to test out new theories and backtest analytical models destined for trading strategies. The number of HFT firms and the percentage of liquidity they provide is proof enough of the underlying value of data.
As Mackenzie points out in his story on tracking trades in real time, Compliance officers now want to leverage the same data to “help improve compliance“. This same data can be used on the other side of the fence by Compliance and Risk officers. Justin Grant describes it well in his article on increasing demands for improvements in TCA: “The trend is taking root as buy-side traders are increasingly challenged to defend their strategies on a number of fronts, ranging from regulators and clients that are demanding greater insight into the investment process…“, and how will they do that? Analyzing trade data, both in
real-time and historic and calculating Sharpe Ratios to measure risk. But as many quants already know, the data is not very useful without extreme query performance and the right set of analytical modeling tools.
These two overarching elements, Performance and Data together drive what I would describe as the Innovation Ante. To be a player or ante into the game in Capital Markets requires both of these capabilities. Vendors cannot just provide just the minimal level of competency. It’s survival of the fittest in the finance industry, pioneering leading-edge capabilities with an ever watchful eye on performance separates the leaders from the losers.
Once again thanks for reading.
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