Extra! Extra! Read All About It!

Writing a weekly column is a mixed blessing. On the one hand, it's a fun way to communicate bits and pieces to Sell-Side Technology readers that might not necessarily be developed enough for a feature or a news story. On the other hand, it makes people a bit wary of talking to you even casually. Naturally, as a journalist, everyone is a bit wary of talking to you ─ my own sister, over lunch last weekend, was telling me about a leading role she'd just landed in a television series, but felt she had to qualify it with the fact that she didn't want to see it in the freesheets next week ─ but all of my meetings this week have been off-the-record.

So rather than base this week's letter over conversations I've had, some of them having been strictly banned from appearing in this very op-ed, we're going to talk about the onward march of advanced technology that has been so highlighted in recent weeks.

Ticker-Tape Parade
It's a phrase used widely in popular culture, but how many people actually stop and think about where the etymology lies? The most famous example of a quite literal ticker-tape parade is when floor traders at the New York Stock Exchange, celebrating the parade for the dedication of the Statue of Liberty in 1886, dumped the contents of their ticker domes into the street as makeshift confetti. The first stock ticker was invented by Edward Calahan in 1867 which, according to this excellent New York Times article on the subject, ran on sulfuric acid batteries that had to be refilled twice-weekly. Later developments would focus around the speed of printing to facilitate more rapidly-traded stocks, but as with most things, technology began to gain the upper hand until trading reformed around the technical facilitators, rather than vice versa.

From there to now, of course, is almost a singularity event. Machines pump out market data at blistering speeds, a veritable typhoon of binary code that allows for great advancements. Actioning off this rapid availability requires the use of algorithmic tools and computer-led decision making, along with advanced analyses and applications of game theory, for instance, and the boundaries of what is possible to achieve in terms of reducing latency have never been pushed as hard as they have been in financial services.

There have been problems, however. As my colleague, Jake Thomases, examines in a tremendously-written analysis piece here, broker Knight Capital nearly fell afoul of that recently, and they're not the only ones. However, trying to wind back the clock, to step through the Janusian doorway back into history isn't going to work. High-frequency trading and high-speed trading, by themselves, aren't necessarily the root of all evil in capital markets, but they're dangerous tools, like any great sophistication. Splitting the atom is arguably the greatest scientific achievement of our time, for example, but it offers potentially unlimited power for mankind in one hand, with nuclear fission and fusion, and unlimited destruction in the form of nuclear holocaust with the other.

The result is basic protection for the sell-side while giving the buy-side a budget under which they may continuously lease or carve up portions of a company's capital intra-session.

The application of the function is what matters, essentially, and as much as people might gripe about regulation, it exists to ensure that the application of said technology doesn't get out of hand.

Aussie Rules
The Australian Securities and Investments Commission (ASIC) has been examining its own oversight of automated trading this week, in draft proposals released for consultation. I covered the announcement here, and it's generated quite a fair bit of debate in the rest of the financial press as well. A lot of the comment centers on the risk management aspects embedded within the rules, which some see as developing linkage between the buy and sell sides.

"Today, we have the technical sophistication to deploy analytical post-trade monitoring that dynamically feeds back into the pre-trade risk connectivity layer, acting to constrain or cease new order flow," says Steve Woodyatt, CEO at Object Trading. "Pre-agreed maximum losses, once triggered, can message the risk layer to block new trades and alert the relevant teams and management, especially in cases where they are blissfully unaware of potential ‘black swans'. Such independent analytics could even, in straightforward cases, suggest covering orders to reduce resultant positions.

"This will ultimately require buy-side institutions and sell-side brokerages to share pre- and post-trade analytics and risk controls. This is crucial so that everyone can clearly read their potential exposures to each other, at all times. Once this is done, all parties have the practical limits on the number and size of contracts that can be filled in a set amount of time. The result is basic protection for the sell-side while giving the buy-side a budget under which they may continuously lease or carve up portions of a company's capital intra-session."

Complete Control
Other strictures involve the submission of systems for review at least once per year, in line with other regional regulators such as those in Hong Kong. This policy of algorithmic review has frequently been lambasted in the US and UK - the Securities and Exchange Commission, for instance, has only just managed to start upgrading its technology to allow it to actually oversee the market, so how it'll adequately analyze complicated algorithms, sometimes written in proprietary code, is anyone's guess. But, ASIC has done a pretty good job so far of learning from EU and US mistakes in regulation with its Market Integrity Rules (MIRs), so it'll be worth watching to see how this latest development in algo regulation pans out.

If you'd like to talk about history, Knight, HFT or what's going on in the land Down Under, feel free to call on +44207 316 9811 or send an e-mail to james.rundle@incisivemedia.com.