Automated Trading's Brave New World: Speed Flexibility and Competitive Advantage Through Open Source

Marketcetera | February 2009

Automated Trading's Brave New WorldSpeed, Flexibility and Competitive Advantage

Through Open Source

Presented byKevin McPartland

TABB Group

Source: TABB Group 2

Agenda

Introduction The Market The Latest and Greatest Execution Management Systems Order Management Systems Looking Ahead


The Market


0

5,000

10,000

15,000

20,000

25,000

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Avg

. S

ha

res

(m),

Avg

. T

rad

es(

k)

0

200

400

600

800

1,000

1,200

1,400

1,600

Avg

. S

ha

res

/ T

rad

e

Avg Shares Per Day (mm) Avg Trades Per Day Shares / Trade Source: TABB Group and Exchange Data

Electronic trading has drastically changed the US market

US Equity Share volume and trades

Dec 07 Avg. Trade Size 247

Shares / Trade

Jan 97 Avg. Trade Size

1,477 Shares / Trade

Decimalization


47%

9%

14%

21%

9%

37%

12%

14%

22%

15%

32%

10%

17%

26%

15%

Sales Desk

ProgramDesk

Direct ToExchange

Algorithms

CrossingNetwork

2006 2007 2009e

-12%

4%

7%

7%

19%

Shares by Execution Venue (volume weighted) ’06-’09 CAGR

Trade flow is continuing to move from sales traders to low touch channels


H 89.53

Volatility reaches wild highs… and stays there

Source: Yahoo! Finance, TABB Group


All of which will continue driving up data volumes

4,000 13,00016,00039,39175,00086,339140,000

573,000

1,300,000

1,540,000

1,846,000

2,157,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

July-00 July-01 July-02 July-03 July-04 July-05 July-06 July-07 July-08 Jan2009(e)

July2009(e)

Jan2010(e)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000OPRA Capacity Recommendations

Messages Per Second (MPS)

4yr CAGR 98%

6yr CAGR 81%


Data is not only abundant, but must also be fast

$168$154

$122

$95

2007 2008 2009 2010

21% CAGR

Spending on Low LatencyMessaging Infrastructure

$USD Millions

Source: TABB Group Estimate

Percentage of Firms Using Low Latency Data

100%

100%

90%

75%

17%

Exchanges

CrossingNetworks

Top TierBroker/Dealers

$5B+ EquityHedge Funds

$150B+Traditional Inv.

Managers


The Latest and Greatest


98%

Trading systems are necessary in today’s market environment

95%

92%

89%

69%

82%

82%

Europe

UK

US

OMS EMS


30%

23%

21%

21%

19%

14%

12%

7%

2%

EMSs / OMSs

Dark Pool Aggregators

Crossing Networks

Nothing Right Now

Advances in Algorithms

Electronic Access / DMA / Connectivity

TCA (pre- & post-)

Commission Allocation Reports

CSAs

When finding liquidity hedge funds value their EMSs and OMSs above all other technologies

Which are the products or tools that are most useful to you?


No57%

Yes24%

Maybe19%

31%

23%

15%

12%

12%

8%

4%

4%

4%

Platfo

rm co

nsoli

datio

n

Inte

grat

ion/

Custo

miza

tion

Bette

r Tec

hnol

ogy

Lower

Cos

ts

Broke

r neu

tral

Mul

ti-br

oker

Faste

r

Ease

of u

se

Mul

ti-as

set

Why are you planning to change your EMS?Are you planning to change your EMS?

Nearly half of buy side participants plan to change their EMS in 2009


Why are you planning to change your OMS?

Are you planning to change your OMS?

Maybe1%

Yes28%

No71%

47%

32%

16%

16%

11%

Perfo

rman

ce/In

tegr

ation

Platfo

rm C

onso

lidat

ion

/ EM

S Only

Need

for M

ulti-a

sset

Dislike

of c

urre

nt sy

stem

Globa

l Rea

ch

Fewer are thinking about an OMS change, yet consolidation is still a key driver


44%

34%

28%

16%

13%

13%

9%

9%

9%

6%

3%

Integration/Customization

Best Available Technology

Relationship

Broker Neutral

Reliability

Global Reach

Multi-asset

Connectivity

Cost

Ease of Use

Portfolio Trading

What are the key factors in selecting an EMS?

Customization and Integration are critical


Only the best will do

More now than ever, buy side traders know what’s out there and what they want

Despite the complexities involved, buy side traders are still willing to make a change to their current OMS or EMS

The ability to customize, integrate with existing technology and consolidated needed functionality is critical


So what’s the problem?


$622$567

$484 $499 $532

$303

$268

$228 $232$241

2007 2008 2009(e) 2010(e) 2011(e)

Asset Manager Hedge Fund

2 Yr CAGR 4%2 Yr CAGR -12%

The global trading system market has contracted


$1,450

$1,249

$869

$691

Estimated Hedge Fund IT Spending ($USD Millions / year)

Scenario 3: Steep declines in the number of funds and IT spend among survivors

Scenario 2: Across the board decline in hedge funds, and modest declines in IT spending

Scenario 1: Current industry figures with modest declines in IT spending

Pre-Crisis Spending Estimates

Due in large part to a decrease in overall IT spend by hedge funds


98%

Unsure45%

Average $400K55%

How much do you pay for your OMS?

The cost of broker-independent technology remains high


2.833.4

5.86.3

4.2

3.1

2010(e)2009(e)20082007200620052004

2 Yr CAGR 43%5 Yr CAGR -15%

Average Number of EMSs Used

Buy side traders are consolidating trading activities onto fewer platforms


Everyone must do more with less

Hedge funds and asset managers will rationalize their application portfolios over the next year

The buy side will look to access all broker provided trading tools through a single interface

Counterparty risk concerns from the global financial crisis will leave some looking for alternatives to broker provided solutions

Doing more with less continues to be the trend


Growing while contracting


33%

25%

18%

10%

10%

5%

Flextrade

Proprietary

Portware

GL Trade

TradeScreen

Other

Hedge Fund Usage of Broker Independent EMSs

Proprietary trading platforms are still common

30%

18%

14%

11%

8%

8%

6%

3%

2%

2%

Charles River

Proprietary

Macgregor

Other

Moxy

Longview

EZE Castle

LatentZero

Bloomberg

Decalog

Asset Manager Usage of OMSs


…but IT budget cuts and new off the shelf technology are causing a change

Internally developed systems are tailored to meet the needs of the firm, but starting from scratch and ongoing support is too expensive and time consuming for many hedge funds in today’s environment

Off the shelf trading technology can prove too sophisticated and too expensive for smaller funds

What other options are there?


The best of both worlds – Buy vs. Build

Buy A working (and proven) system right out of the

box Ongoing support for the product

Build Complete control over the code base A system unique to your competitors Customizations at will

Open Source All of the above


Open source growing in financial services

The use of Linux is widespread from major exchanges to top tier investment banks

Products such as MySQL and Apache sit underneath many mission critical applications

A number of banks along with an enterprise messaging provider all support the development of the AMQP messaging standard

OrecX is used to record spoken trade details Financial specific Open Source projects continue to

grow in sophistication and usage such as Quick FIX and QuantLib


In steps the open source trading system

The idea of an open source OMS may prove a good alternative for those contemplating whether an internally developed system makes sense.

Open source platforms are created by a community of developers and distributed for free. Providers make money from these platforms by charging fees for maintenance and support.

A few years ago this idea seemed crazy for financial services, but in today’s cost conscious environment an open source OMS can provide just the right blend of buy vs. build for some buy side firms.


What the future holds


9%

16%

9%

25%

13%

27%

25%

56%

44%

34%

48%

19%

32%

21%

16%

1%

1%

1%

Functionality

Support

Innovation

Integration

Low Below Average Average Above Average High

Current Satisfaction with EMS Elements

Despite generally high markets, more innovation is needed


Summary

In an effort to cut IT spend and create a more efficient trading process, the buy side is increasingly looking to rationalize their use of trading technology.

Buy side traders know what they want, making customization key

Everyone is trying to figure out how best to do more with less

Open Source can provide a piece to that puzzle for many

Marketcetera | February 2009

Automated Trading's Brave New WorldSpeed, Flexibility and Competitive Advantage

Through Open Source

Presented byKevin McPartland

TABB Group

Automated Trading's Brave New World: Speed Flexibility and Competitive Advantage Through Open Source

Technology

Transcript of Automated Trading's Brave New World: Speed Flexibility and Competitive Advantage Through Open Source