Baader: Latency, BestEx are Key Data Challenges

German investment bank and market maker Baader Bank has identified latency and best execution analytics as key data challenges as it gears up for new trading challenges brought about by a more competitive market structure, according to a presentation at last week's
Copenhagen Financial Information Summit.

The German bank trades directly on most European exchanges, as well as some pan-European multilateral trading facilities, and uses a mixture of direct feeds and consolidated feeds to support its data requirements. But while MTFs may "come and go" as the markets evolve - such as Nasdaq OMX's recent decision to shutter its Nasdaq OMX Europe initiative - the everyday challenge of building a scalable and reliable data infrastructure to source and process increasing volumes of data from multiple markets will remain a constant challenge, said Peter Blenninger, head of software development and quality management at Baader Bank.

European banks also face increasing competitive threats in the form of high-frequency trading firms that originated in the US but are now setting up operations in Europe, and which are placing an ever-increasing focus on latency. "You have new competition out there, and this means you have to get the data as fast as possible," Blenninger said.

In addition, the data requirements of being able to prove best execution are an increasing challenge, in terms of ensuring that brokers have access to transaction cost analysis tools that can demonstrate compliance with best execution obligations, in the event that they are challenged by clients on trades. "Best execution, if you do it right, means you would need a market snapshot for every execution covered by your best execution policy," Blenninger said.
But even such a system can run into difficulties when attempting to demonstrate that best execution obligations have been met for over-the-counter trades agreed by phone rather than on an exchange or alternative electronic trading venue. "When a trade is closed on the telephone, then best execution obligation is documented manually," he said.

Larger trades that are taken by phone but then executed via a smart-order router or other algorithms can be monitored and analyzed over time to ensure best execution, though the quality of execution for these trades will be subject to latency as a result of the manual component. "When [a trader] takes that trade [over the phone], it would usually be worked... through an algo or another system," said Edward Strauss, head of sales and electronic trading at Baader Bank, adding to Blenninger's presentation from the audience. "But you're going to have that latency any time you make a telephone call-from when a trader hears a trade to when he puts it in the system," Strauss added.