Euro market ushers in next-generation trading platforms

These systems were driven by keyboards and fingers. The efficiency of these systems was not about speed of execution - they focused on minimising exceptions and eliminating re-keying of data, allowing for an automated audit trail.

Recent times

As more 'trader assist' tools were adopted, a trader could focus on the quality of execution along with market impact. The market began to move to more sophisticated VWAP (volume-weighted average price) benchmarks. The brokers began to bid for portfolio trades and traders needed to manage a list of stocks across several venues. To meet this need, execution management systems (EMSs) were developed.

Whereas OMSs were keyboard driven, EMSs offered screen-based assistance to the trader. The screen enabled lists of stocks or portfolios to be actively traded and managed. Fills, cancellations and new orders were automatically displayed alongside target lists. Additionally, traders could choose from a variety of algorithms and integrate liquidity found in MTFs (multilateral trading facilities) and dark pools. The drive to improve trading performance, together with the need to execute multiple securities simultaneously, put a greater focus on execution speed.

Today

Around the time that EMSs hit the market, there was an effort to segment the type of order flow that the buy side was sending to the sell side. The sell side began to refer to high-touch orders, as opposed to low-touch orders, and eventually recognised a class of 'no-touch' orders.

This prompted the birth of DMA (direct market access) systems. DMA systems delivered a low-cost, shared infrastructure for routing trades directly to the market. Since most DMA systems were 'bolted' onto an existing trading infrastructure, they only offered trading speeds that had been historically attained. Thus, DMA systems did not directly increase the volume or the speed at which trading could be conducted. But the concept of direct market access played an important role - it paved the way for the next wave of sophistication in the market.

Tomorrow

Proprietary trading firms and hedge funds realise that current trading technology, along with co-location facilities and the concept of direct access to exchanges, enables trading strategies and efficiencies that, historically, were only feasible for the sell side. Brokers, in an effort to capture these clients and this new order flow, are realising their current systems cannot meet the speeds demanded. In fact many brokers are realising that it is not just their trading infrastructures but their risk systems, compliance systems, and clearance processes that cannot meet high-speed demands. Thus, an opportunity is emerging for a new breed of execution, risk and compliance control platform.

Termed 'distributed execution and risk control' platforms (DERs), these systems provide three critical components: co-location direct access across multiple venues; high-speed execution management; and real-time risk controls. Unlike OMS, EMS or DMA systems, these platforms are deployed in a distributed architecture, co-located with the trading venues and can initiate hundreds or thousands of trades or cancels per second, simultaneously across market centres, while keeping real-time positions and capital authorisations in check.

DERs are designed to be deployed in a distributed manner, and are driven by algorithms 'listening' to market signals. They were conceived to exponentially increase the number of trades that can be simultaneously managed. There is no user on the phone and there is no keyboard or trader driving a screen. The platform is driven by fully automated trading strategies, which scan the market using direct data feeds. Using the data feeds, the program identifies 'signals' to enter and exit the market. Signals will trigger hundreds or thousands of messages per second while feedback loops provide dynamic strategy decisions for the algorithm.

The trading firm can plug-and-play its trading algorithm into the execution platform. All components are optimised for consistency and speed. Fast market data ensures that strategies are alerted to the market opportunity as soon as the market signals change. The rapid-fire executions and cancellations ensure the platform can scale to the opportunity. And the pre-trade risk checks, position-keeping and limit controls ensure transparency of the strategy's overall performance.

Underneath are a set of capabilities to ensure resiliency and scalability of the platform including transactional load balancing, exchange acknowledgement delay alarms, and conversion to the highest speed protocol for the targeted exchange. To complete the solution, providers of these new execution platforms must also offer a full set of trade compliance reports to detect rogue-trading patterns such as baiting the book or wash trades.

Automated trading and risk controls

These platforms have not only enabled frequent interactions with the fragmented market, but have also simultaneously enabled transparency of the trading results to the broker and fund. Now the broker can implement real-time pre-trade risk controls and position-tracking for each trading strategy, or fund, they prime - without compromising speed. And, even though trading takes place across multiple venues and asset classes, a consolidated position is easily tracked in real-time. Additionally, the fund can work across multiple prime brokers while tracking its real-time net position.

With the confidence of real-time risk controls, many brokers have been actively expanding their execution business. And, with the assurance of a consistent high-performance platform, funds have been able to scale their trading strategies. As is the case with many innovations that address barriers to entry, DERs are helping to increase efficiencies, provide transparency to trading risks and open the market to more participants. >