Trading's 'next big thing'

With new ways to conduct real time analysis, better execution control and new transaction cost analysis products, Jonathan Watkins asks where is the ‘next big thing’ in trading technology?

With new ways to conduct real time analysis, better execution control and new transaction cost analysis products, Jonathan Watkins asks where is the ‘next big thing’ in trading technology?

The phenomenon of cloud technology and the much-talked-about latency race are just two examples of how technology has shaped the world of trading in recent years.

Trading has become faster, more efficient and increasingly reliant on technology advances. In these times of increasing market regulation and declining liquidity, technology is being welcomed by market participants as the cure to a great many ills.

“Innovation has always driven technology in trading from the telegraph to the ticker; from NYSE’s data centre in Mahwah to FIX, and then algorithmic trading today,” said David Weiss, senior analyst at Aite Group.

Real-time analytics has been a prime example of where technology has equipped traders with new and innovative ways of reviewing their strategies.

The ability to reviewing trades immediately after execution in order to apply the lessons learned to future strategies, trades or algorithms, is a useful instrument for a trader’s toolbox.

With some market participants believing the low-latency race is over and no longer a competitive differentiator, some believe that the need to become more strategic is now of greater importance.

Alexander Lamb, head of business development, Americas for The Technancial Company, said: “The ability to identify activity and value change both on existing positions and on markets that the trader has an interest in is imperative in the competitive world that traders inhabit.

“In the past, a disciplined trader would apply his craft, follow his established methods and win at least 51 per cent of the time, cut losses and run profits.

“Being able to reconstruct and deconstruct the activities that outperform or underperform quickly mean that decision making can be modeled to new market conditions.”


Surveillance and risk

Real-time technology is being applied to market surveillance, risk management and transaction cost analysis, which traders hope will give them a competitive advantage.

Real-time technology allows market participants to meet new regulations which enforce stricter risk management practices. Monitoring activity in real-time also gives investors the ability to respond to market risks such as glitches and rogue algorithms.

Algorithms themselves have come so far as to dominate the markets these days, however the innovation is now in algorithms that monitor other algorithms.

This initiative could see automated systems select algorithms to suit different situations following real-time analysis of performance and market conditions.

There has also been a rise in demand for ways to rapidly develop new algorithms, including customised strategies for clients.

“The relentless competitive pressure in algo trading has lead to the current focus on performance and time-to-market to deliver the next algo,” said Sylvain Thieullent, CEO of electronic trading, EMEA and Americas, Horizon Software. “Traders are [now] creating, testing and implementing algos within incredibly short timescales.”


Outside of equities

Electronic systems have been revolutionary for the equities markets, however, the ability to apply these systems to illiquid markets is where the market’s next innovation could come from.

Tony Russell, head of trading at Newton Investment Management, believes the fixed income market, which has been deprived of liquidity, could be next in line to undergo a transformation through technology.

“For me, technology is the biggest up and coming area and will continue to be the focus of our industry for years to come,” he said.

“There is a huge push for these platforms to be buy-side-to-buy-side in all asset classes because ultimately they are the ones holding the liquidity. For us, being able to increase liquidity in the market is by interacting with where that liquidity is.

“If I go back 20 years ago there were 20 plus platforms and at the end of the day the best of breed wins and in five years time it will be the same for fixed income.”

Near real-time pricing for fixed income is also seen as a key step in the electronification of the asset class and draw in liquidity.

While other asset classes have become almost entirely automated from a data collection perspective, fixed income is still a way off.

Russell adds that technology advancements have changed the nature of the buy-side trading desk over time.

“If you went back 10 years, the sell-side desks would take your orders and really work for you. Because of algorithms, crossing platforms and many other technologies to find liquidity that have been introduced, we seem to have more tools on our desktop, that we need, but this comes with added pressure and a strain on resource.

“Because the buy-side trader has to manage the many execution tools himself that becomes an increased responsibility. But do our desks have more resources? No. Has our businesses grown? Yes.”

• This article is taken from the TradeTech Newspaper, published at the TradeTech Conference 2015 by The TRADE.