Exchanges are modernizing, market participants are investing heavily in technology and electronic trading is on the rise. The end result? Firms today face a challenging new market environment, one that is fractured, extremely competitive, and constantly evolving. Portware's Damian Bierman explains why bringing in the experts could be the best investment you'll ever make.
Today’s global trading landscape is vastly different than it was twenty years ago. Structural, economic and regulatory forces, combined with major advancements in trading technology, have ushered in a new era of automated trading. In the United States and Europe, numerous electronic market centers – exchanges, alternative trading systems (ATSs), electronic communication networks (ECNs), and crossing networks – compete for client order flow, offering superior execution speeds, reduced market impact, anonymity, or a combination of the three. New regulations in the US (RegNMS) and Europe (MiFID) have hastened the pace of structural and technological change. As for Asia and other emerging markets, they are not far behind.
At the same time, all market participants – buy-side firms in particular – are under increased pressure to reduce trading costs and rationalize their IT budgets. This is not a new trend. While the recent economic downturn is partly to blame, the goal of bringing increased efficiencies to the trading desk predates the global credit crisis. For firms in all global markets, the challenge is twofold: deploy advanced trading technology that will allow you to navigate – and exploit – today’s complex marketplace, but do so with an eye towards long term value and scalability.
New requirements for a complex market What constitutes “advanced trading technology,” and what do firms really need to compete effectively in today’s market? To answer that question, consider the challenges posed by today’s market:
Access to fragmented liquidity. Firms today face an increasingly electronic global marketplace, and one that offers a wide choice of execution destinations. However, with increased choice comes increased responsibility for execution quality. In such an environment it is incumbent on market participants to take greater control of their order flow. From a trading standpoint, this means the ability to access all available sources of liquidity – including broker execution algorithms, crossing networks, exchanges, ECN’s and other pools of non-displayed liquidity – from a single trading environment.
Advanced trading tools and analytics. Given the complexity of the market, traders must have access to integrated toolsets with which they can make informed decisions. Pre-trade transaction cost analysis (TCA), real-time benchmarking and performance measurement, portfolio-level analytics and post-trade TCA – all of these help traders to efficiently gauge trading costs and route orders accordingly. Consolidating and integrating these toolsets into the trading process is critical. Not only does this drive efficiency, it allows for the analysis of orders at any point during the trade workflow cycle, helping firms gauge traders’ decision making processes (and overall performance).
Performance. For many firms,the recent spike in volatility has been a painful experience. Soaring trade volumes and related message traffic have crippled legacy trading systems. Unfortunately, these kinds of volumes are fast becoming the rule, not the exception. Technology that can withstand this kind of message traffic is no longer a luxury, but an absolute necessity.
True multi-asset support. The ability to trade multiple assets on a single platform offers numerous advantages to firms today. First, connecting data feeds and workflow applications to a single platform reduces integration costs and operational overhead. Second, multi asset systems can support advanced strategies such as auto hedging and multi-asset arbitrage, both of which are becoming increasingly popular.
Flexibility and ease of integration. Given the web of interconnected workflow applications, data feeds, and other third party and proprietary systems that firms have deployed, having a system that can easily interface with the rest of a firm’s technology infrastructure is another key requirement. The alternative – closed systems based on rigid technology architectures and proprietary languages – are difficult and prohibitively expensive to deploy. While the short term costs associated with deploying closed systems are considerable, the long-term costs can be enormous. The more difficult an application is to integrate, the harder it will be to upgrade it or customize it in the future. Eventually, such systems become part of a firm legacy infrastructure: out of date and costly to maintain, but too expensive to replace.
Damian Bierman, Portware, Mo Takhim, ULLINK and Gregg Drumma, Gamma Three Trading take a closer look at the way the FIXatdl standard is changing algorithmic trading.
Without a doubt, FIXatdl is going to revolutionize the way algos work.
On the front-end, FIXatdl standardizes an algo suite’s data flow, controls, and layout. Traders like it because it provides a more predictable look-and-feel, and an overall more consistent user experience.
On the back-end, platforms supporting FIXatdl will benefit from greater ease of maintenance and updates. With FIXatdl, updates to algo specifications, or customizations that brokers wish to present to their clients, can be realized by updating a single file. Gone will be the days of having to undergo lengthy development / release cycles to affect what may be conceptually a very simple change to a couple of tags for a particular strategy. By using FIXatdl, firms will be able to significantly decrease the time-to-market for new and updated trading strategies.
Considering the advantages and current maturity of the FIXatdl standard, it appears that wide-spread adoption is just around the corner. The ever increasing need for customer controlled order behavior and the chase for best execution dictates a change in the current process, and FIXatdl is a great recipe for delivering it.
Ask any broker how seamlessly their algorithms are currently implemented in each buy-side system and even the most sophisticated algorithm providers will agree that this is a painful process that not only is expensive to them, but more importantly, time consuming.
The question remains, with the progress this industry underwent over the past few years, how does this issue still exist, while the usage of algos has skyrocketed to unprecedented levels? Enter FIXatdl, the FIX algorithmic trading definition language. It was designed based on the input from several market participants representing broker-dealers, OMS/EMS vendors, buy-side users and other vendors.
From a buy-side perspective, clients can benefit from access to their brokers’ algorithmic trading strategies as soon as they are available in FIXatdl XML format, thereby significantly reducing the resources and time spent on performing analysis and development.
From a sell-side perspective, algo providers are able to develop and build FIXatdl compliant algorithms in a matter of hours instead of months. Brokers and other algorithm suppliers also have the ability to customize specific strategies based on their client needs and submit the XML file to be rendered immediately in their client’s front-end system.
This creates a whole new race in the vendor space. A few core EMS vendors have been pro-active in the adoption of FIXatdl and are already offering this service to their clients and others are slowly following their steps.
There is no argument that the potential upside of FIXatdl is huge. The reality is that the race to adopt FIXatdl has already started; the only question that remains is when you will join?