By Edward Sanderson, Vice President, Advanced Execution Services, Credit Suisse
Sophisticated trading strategies, a shifting regulatory landscape and rising cost pressures are forcing firms to choose how best to integrate their dealing platforms.
Traders typically aim to integrate their platforms across the spectrum, from market monitoring to idea generation, trade execution, analysis and risk measurement. However, although the usual image is of a trader operating with a multi-screen setup, there are limits to what can realistically be monitored simultaneously.
Many trading strategies require dealing in multiple asset classes to better reflect their view in the marketplace, whether the strategy is macro-, quantitative- or arbitrage-based. In addition, screen real estate remains at a premium.
These pressures are driving a wider adoption of integrated automated platforms for different asset classes, notably to incorporate simultaneous trading in cash equities and futures.
A multi-asset platform can take several forms and indeed will rarely comprise a single solution. As a result of the varying requirements of a number of complex financial products, a multi-asset platform will typically be made up of disparate platforms that have their own specialisations. These become multi-asset by applying a veneer of technology or human management – and frequently a combination of the two – to enable them to work together.
Choosing the right platform
Platform selection is a matter of personal choice, and depends on numerous factors. Connectivity, product availability and individual experience are commonly cited as the most influential considerations, with one eye always kept on the overall cost and maintenance of the trading ecosystem.
Furthermore, the demands of the platforms are quite different between buy- and sell-side firms. The buy-side normally links to two or more brokers with the aim of using a consistent suite of tools that will connect to the relevant systems within their own infrastructure as quickly as possible.
In contrast, the sell-side aims to have one platform that can receive connections from multiple clients and enable the firm to manage cross-asset flow.
FIX is the predominant protocol for transactional messages between dealing platforms. Ancillary systems frequently use a combination of different methods, such as secure FTP of text files that are used for, among other things, static data and trade position information.
Although the traffic flowing through the system is FIX-based, other components are also often used to connect the buy- and sell-sides, that do not speak the FIX language. Moreover, the set of components that comprise platforms frequently include legacy applications, or applications that have been added through acquisition or “tactical” solutions, so the existing structures, and the roadmaps that led to it, are often convoluted, complex and confusing.
Regulation is also a key issue here. As all market participants increase their focus and resources on new rules and requirements, and as the pace of regulatory development accelerates, buy- and sell-side firms have to make adjustments to previously stable, workable platforms to ensure compliance.
In Asia in particular, the number of diverse regulatory jurisdictions across the region can add another dimension to the complexity in the design, implementation and maintenance of an automated system.
Restraints on automation
An alternative path, especially for buy-side firms, and if the costs and complexity are too great, is to emphasise the role of human agency. A lack of staff and capital resources might limit the ability to install new automated systems, while the difficulties of dismantling engrained and often impenetrable legacy systems might make firms unwilling to replace them. In any case, many firms, even those that deploy sophisticated automated trading systems, value the human element to generate ideas, gather market colour and control information leakage.
In addition, trade execution algorithms (“algos”) typically follow a specific set of rules, whereas a human trader has more flexibility to follow more complex and variable instructions. Certainly, algos are moving towards less rigid, formalised functions, but again this might not be to every firm’s taste or budget. Of course, a compromise for some investment managers is to pass over the trade execution process to a broker or sell-side agency desk.
Clearly, the state of the industry is in flux. Market participants have to adjust to a rapidly evolving regulatory environment while digesting and perhaps assimilating new technologies. The danger is that the new, expensive and disruptive systems might be overtaken and made redundant by even more sophisticated systems that adapt better to future regulatory changes and are able to facilitate trades more successfully.
There is no common set of requirements or functionality for platforms to aim at. It is likely that if such a standard did exist, it would become outdated faster than it could be maintained because of the pace and scale of changing requirements generated by regulation, products and technology.
Platform functionality at its very basic level is quite simple, requiring just product and transactional information – what to buy or sell, how many shares and at what price. However, the shifting landscape means that both buy- and sell-side firms must be flexible and prepared to embrace systems that work best now and that are likely to be sufficiently adaptable to function in the future.
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