Published in Markets Media Magazine
As markets and regulations have evolved, so has technology. Whether on the trading desk, the back office, or on servers in remote data centers, the appetite for technology is increasing at a robust pace.
“We have a convergence where technology is available to help facilitate the levels of transparency, compliance, and regulatory oversight needed to address the new demands and scrutiny of the end investor,” said Joe Wald, chief executive officer of Clearpool, a trading software and execution company.
Clearpool has introduced trading technology called Iris that’s designed to transform how orders are handled electronically to improve liquidity interaction and fill rates.
Iris aggregates orders to elevate their prioritization in a venue’s execution queue, giving clients trading through Clearpool Execution Services, an independent agency broker-dealer, the opportunity to derive a better quality print.
Clearpool envisions a marketplace that is rooted in the electronic environment that exists today, but is looking at it from a different perspective. In particular, it’s seeking to revamp the role of the traditional agency broker in routing orders.
“This was a really ground-up approach,” said Ray Ross, executive vice president and chief technology officer at Clearpool. “We threw everything out in terms of how these things have been done in the past, at least in terms of the way that agency-brokerage technology would work.”
The historical agency-broker model is to work a customer order by using algorithms to ‘slice and dice’ the order into smaller pieces. “All of the placements of that algorithm are tied to the customer order that comes in,” said Ross.
Clearpool has taken a different approach, whereby instead of placing orders individually, it bundles them together. The system is designed to improve trades that are executed algorithmically by decoupling ‘child’ orders routed to a venue, from the parent order. When a customer cancels an order, Iris in turn cancels or reduces the order with the lowest queue priority. This automatic response effectively enhances the queue priority of all other Iris orders.
“Divorcing the order placements from the customer orders coming in allows us to do some interesting things around managing the order placements into the market, and it gives us the ability to use our customer scale so that we look more like a trading entity as opposed to a whole bunch of individual customer orders,” Ross said.
Clients trading through Clearpool Execution Services will automatically have their order placement guided by Iris to improve handling in both price/time and price/size venues, with cancel/replace orders and in sourcing block liquidity in dark venues.
Managed Services
One of the key technology themes for 2015 is outsourcing, as firms seek to reduce costs while increasing their flexibility related to trading technology. Managed services providers have grown beyond their traditional role of keeping the lights running in financial organizations, to assuming control over alpha-generating activities such as trading and risk management.
“Managed services is about managing not only just the physical aspects of the trading infrastructure, but the entire suite of services, such as managing exchange-mandated changes and reducing latency,” said Moshe Siegel, vice president of product management at 7ticks. “By outsourcing some of those activities to an MSP, firms can focus on their business and their customers.”
7ticks, which provides trading infrastructure and services, including direct market access, co-location, and proximity hosting to global direct exchange data and consolidated data, is delivered as a managed services offering from Interactive Data Real-Time Services.
When it comes to trading speed, an increasing number of organizations are satisfied with being fast enough. rather than the fastest. Low-latency demand is balanced with increased requirements for infrastructure predictability and stability.
“We’ve seen a shift in our client base where there’s less of a ‘race to zero’, where instead of being the absolute fastest every single time, customers are more interested in predictability and deterministic metrics,” Siegel said.
Firms need to know that trading system performance will be uniform across locations. “They want the ability and the assurance that the data they receive in one location is going to be consistent with the data they receive in another location,” Siegel said. “If they’re utilizing our network to receive exchange data in Chicago, they want to know that as we provide managed services to them in New York and London and Tokyo, that data is consistent. This allows them to develop strategies based on the knowledge that their environment is stable and that what happens on a Monday from a performance perspective is going to be the same as their performance on a Tuesday.”
While the largest and most sophisticated funds can handle most aspects of multi-asset class portfolios in-house, the majority of pension funds will need to make a choice about where to be a specialist and when a sub-contractor is needed.
“Once they start going down that path, they start to realize that the investment operation infrastructure necessary to build out and staff an investment operation is not easy,” said Martin Sullivan, head of asset owner sector solutions for North America at State Street. “It’s something that’s got to be well thought out.”
One option is to retain control over core allocation decisions, while outsourcing certain investment operations. “I might want to hire somebody to run my IBOR and offer me the tools and technology to do that,” Sullivan said. “They’re committed to insourcing certain mandates because they see it as a way to reduce costs, while continuing to generate the alpha that they need, and it isn’t across the board for every mandate, it’s just certain mandates. Maybe it’s fixed income. Maybe it’s short-term cash. Maybe it’s international equities.”
Each investment mandate still requires portfolio management software and trade order management utilities. “There are solutions out there that they can pursue, but it’s a bigger project than just saying, ‘Why don’t I go out and hire this kind of talent and bring them in, and then I’m ready to roll?’” said Sullivan. “You need to build out that investment-operation infrastructure to make that happen. In many of these plans, it’s going to take a lot of due diligence, and working through a procurement process. All that takes time.”
Institutional investors globally spent more than $12 billion on their trading desks last year as they raced to keep pace with the growing speed of electronic markets, changes in market structure and lower trading costs, according to Greenwich Associates.
In 2014, nearly two-thirds of the budgets supporting buy-side trading desks went to trader compensation. The remainder was spent on technology, including software, hardware and infrastructure. About three of every five dollars spent were allocated to fixed income, where trading desks are navigating the movement of increasing amounts of trading volume to electronic platforms.
Order management systems and market data terminals remain the top two technology expenses for buy-side traders, accounting for 53% of the total technology budget.
Bond Focus
Fixed-income trading desks remain in an investment phase, with spending up 11% from 2013. The market structure for government and corporate bonds continues to evolve, as investors focus on better access to both liquidity and improved cost analytics. The importance of human capital on bond trading desks is also important with budget allocated for trader compensation growing in 2014.
“Although the fixed-income market is awash with new data and trading protocols, relationships are still king,” said Kevin McPartland, head of market structure research at Greenwich Associates. “The best technology platforms are of little use without traders who know the unwritten rules of trading bonds – especially when volatility comes back and interest rates rise.”
Cybersecurity has emerged as a hot-button issue, as hedge funds and other buy-side firms seek to shore up their defenses against cyber attacks. “Information security is probably the hottest topic right now. Everybody’s concerned,” said Jonathan Bohrer, chief financial officer at Abacus Group, a provider of hosted managed services to hedge funds. “The consumer data breach issues that you read about in the paper involving Home Depot and J.P. Morgan Chase are also existent in the commercial investment world, and in many ways could be more significant.”
Abacus Group last year appointed Brian Lozada as director of information security. Lozada had previously held the same post at Condé Nast, where he was responsible for overseeing the security and risk management for all digital and technology operations. “Having a strong set of expertise around managing this risk for your clients is of utmost importance,” said Bohrer.
A low-tech cyber-attack nicknamed FIN4 targets individuals who possess non-public information about mergers and acquisition deals and major market-moving announcements, particularly in the healthcare and pharmaceutical industries, FIN4 targets user credentials by embedding malicious code into legitimate Microsoft Word or Excel document that prompts the user for their Outlook credentials. The attackers also send emails with links to fake Outlook Web App login pages that will also steal the user’s credentials.
“This attack is really focused on e-mail. It doesn’t have to do with the corporate network or a lot of other things that a lot of the recent attacks have been focused on,” said Joram Borenstein, vice president at Nice Actimize. “We know a lot of companies still don’t use more than a password to get access to their e-mail, which is not a recommended best practice. It’s important to conduct due diligence around all aspects of e-mail traffic, including who has access to e-mail, looking at multiple devices for the same account from different time zones, locations and IP addresses.”
Closely tied to information security is the issue of disaster recovery. Since Hurricane Sandy devastated the New York area in 2012, financial firms have become more attuned to the need for resilience.
New Frontier
Wald of Clearpool notes his firm’s goal is building technology for the end beneficiary, which typically is the investor. “The way that they come to us could be either through a buy-side entity or through a sell-side entity,” he said. “A big part of our business is going to be offering our technology and services directly to the sell-side, who have been pressured tremendously by their buy-side clients to offer them something unique and something different.”
He added, “A big part of our strategy is to work closely with the sell-side who are there to help provide execution to buy-side firms. We see ourselves as that destination that the sell side would prefer to go to in order to deliver some really unique and differentiated execution results and execution quality.”
Clearpool has adopted as its tagline, “The New Frontier of Trading.”
“What we see is a much more aware and involved end user,” Wald said. “One that really is demanding another level of transparency into the whole execution order routing and handling process. Whether it’s the tick-pilot that’s coming or reviews of dark pools that have been prevalent throughout the Street and a number of other things, even re-looking at Reg NMS, ultimately these things wrap themselves up around market integrity. There’s also a new generation of compliance tools that really are critical to maintain the market’s integrity at this point.”
Featured image via Dollar Photo Club