Business Making Progress

Our 2012 Predictions: What to expect in capital markets

What will we see for capital markets in 2012?  The countdown to 2012 has begun. On the capital markets horizon is a great deal of change – no surprise to those following this year’s rollercoaster of rogue algorithms and regulation tension. So with no further ado, here are our capital markets predictions for 2012:

 1. Billion Dollar Blunder. At least one financial institution will take a billion dollar (or more) hit when a rogue algorithm goes wild. The algo will go into an infinite loop, taking on an irreversible and un-hedged position, which cannot be shut down. Losses will challenge those by human rogue traders, which banks and financial institutions will prevent from happening next year.

2. Occupy HFT. The public, government and regulators will start the "Occupy HFT" movement -- a popular uprising against the ultimate elite of those making money in this climate. Despite immense financial industry pressure, regulators in both the US and the EU will be panicked by investor and political disapproval of HFT and will rein it in with draconian rules and controls.

3. SEFs Spur Splash Crash. Swaps execution facilities (SEFs) will revolutionize OTC derivatives trading, enabling them to be traded electronically. This, in turn, will lead to increased risk of a cross-asset class swaps "splash crash" which will confound regulators, who have little understanding of these markets.

4. Global Regulation Rocks. Countries will finally realize that regulatory harmonization is a good thing and that individual self-interest is not. Banks and financial services firms will realize that they need to think like regulators, taking control of internal surveillance and compliance before regulators make them do it.

5. RICs Get Smarter. The RICs in BRICs are getting smart order routing and gearing up for an increase in algorithmic trading. This, coupled with looser regulations, will begin to attract regulatory arbitrageurs and Volcker Rule escapees.

6. The Wild East. The West's supremacy in financial markets will further decline as new trading regulations - the Volcker Rule in the US and MiFID in Europe - create a surge of regulatory arbitrage favoring more lightly regulated geographies such as Russia and China. Wall Street and the City of London will lose human and financial capital as a result.

7. Financial Terrorism. An exchange or trading destination will be hacked by financial terrorists intent on manipulating markets for political gain. This will lead exchanges and ECNs to add more stringent monitoring and market surveillance capabilities.

8. Head in the Clouds. Explosive growth in foreign exchange trading and SEFs means that participating firms will require complex hosted solutions. Even the smallest FX broker needs aggregation and pricing services which require a big technology footprint. SEFs present new challenges as swaps markets attract algorithms and require surveillance.

9. Crime & Punishment. Regulators are cracking down hard on financial fraud and market manipulation and they will bring in some big fish in 2012. Prosecutions and punishments will increase in size and in impact.

There you have it – nine predictions for capital markets in 2012. What are your thoughts on these predictions, and have we missed any? Comment below, or tell us on Twitter at @DrJohnBates or @ProgressSW.

Computerized Compliance: Savior or Intruder?

Several top executives of UBS, one of the world’s biggest banks, resigned in disgrace this fall following the announcement that a very junior rogue trader in the London office had managed to lose the astounding sum of $2 billion.

Government regulators had already been pushing banks to make sure they knew their risks and commitments at all times. Clearly, UBS didn’t have the automated systems in place that would have alerted higher-ups to the exposure. Some critics asked how an individual ETF trader could have authorization to take such a huge risk. Presumably UBS had set limits for each level of trader, but a flaw in the system let the man keep increasing his exposure.

Automating compliance in the world banking systems should be a no brainer. With the velocity and volume of transactions, only computers can make the trades, and only computers can monitor them. Some regulators buy real-time market surveillance monitoring from Progress Software, the same company that provides real-time trading software to investors (and the sponsor of this blog).

But computerized compliance can be a two-edged sword. It can be so restrictive that traders can’t do their jobs of creatively managing risk. 

And when corporate managers start pushing their CIOs to monitor compliance in other areas they can get into difficult areas of employee privacy. MIT research fellow Michael Shrage, recently wrote in Harvard Business Review that, “very few CIOs want to become the ‘Chief Interrogation Officer’ or ‘Chief Invasiveness Officer.’ But those are roughly the roles they're being asked to assume as the enterprise dependence on their technologies expands.”  He points to requirements to monitor e-mails and text messages for disclosure of secrets or terms of harassment.

Most companies make it clear to employees that they should have no expectation of privacy for anything they do on a corporate computer or corporate network. And workers are coming to understand that anything bad that they say about their companies on their private Facebook pages or Twitter feeds could get them fired.

The issues of compliance and privacy are becoming more difficult as companies increasingly allow employees to use their own technology, such as iPads and iPhones, on the corporate network. It’s very easy to accidentally write an intemperate e-mail or forward an inappropriate picture with your corporate account rather than your private HotMail.

The ability to monitor all kinds of electronic activity by employees makes it tempting for companies to do so. But they need to carefully consider exactly what they want to monitor. And they should let employees know the boundaries.

Some companies have adopted loose guidelines. Microsoft’s unofficial policy on employee blogging is “don’t be stupid.” But with Millennials entering the workforce, understanding of what is “stupid” may be lacking. Someone has to warn them that lines that were clever on their semester-abroad blog might be offensive in a work Wiki.

Computerized compliance is a necessity in many functions. But companies need to consider carefully what they monitor and what they do with the information they gather.

Can market surveillance help to keep traders on track?

"According to TABB Group new compliance costs are indicated at between 512 and 732 million euro, with ongoing costs between 312 and 586 million euros.  But while regulators are still determining what regulation will look like, the need for market surveillance is undiminished. Traders made about 13.3 billion euros ($18.2 billion) from market manipulation and insider dealing on EU equity markets in 2010, according to an EU commission study.  With some arguing that firms can only do so much to survey markets themselves as trades cross multiple brokers and gateways, the panel discussed the need for fragmented market data to be brought together in a consolidated tape and surveillance performed at an aggregate market-wide level."

This is just an excerpt from a recent post to our Event Processing Blog by Richard Bentley, VP Capital Markets, Progress Software. Can market surveillance help to keep traders on track? Read the entire post.

Is Revolution the Path to Transparency?

Revolutions are proliferating.  When you watch a revolution happening elsewhere, political or otherwise, it’s a good time to contemplate the revolution in your own history, or in your future.  There are few among us that can’t point to one or the other.  One of the common drivers is the fear that something is happening where we can’t see it happen, and we want transparency – of process, of government – of whatever seems to be wrong.

The capital markets globally are experiencing a similar revolution now with regulatory change, and the current climate threatens to create a revolt as well.  Market participants may push back on reforms to the point of creating a new state of stress.  Either way, the future presents very real threats to companies that aren’t prepared.  We’re observing a vast expansion of global rulemaking, and a coming deluge of data - especially in the derivatives markets. It’s very expensive and distracting to fix problems after the fact, so we need to act now.  “Hope is not a strategy” – as is often said to have been uttered by famed (American) football coach Vince Lombardi.

In an open letter to Barack Obama published on January 23, 2009, Benjamin Ola Akande advised, "Yet, the fact remains that hope will not reduce housing foreclosures. Hope does not stop a recession. Hope cannot create jobs. Hope will not prevent catastrophic failures of banks. Hope is not a strategy."

Now we have the Dodd-Frank Act in the U.S., MiFID II and EMIR in Europe, all preceded by the de Larosiere Report (EC, 2009), Turner Report (FSA, 2009), Volcker Report (G30, 2009), G20 – Feb 2009 Declarations, Financial Stability Forum Report (FSF, 2009), INF Report (IMF, 2009), Walker Review (UK, 2009), Basel / IOSCO Reviews… the list goes on.  And the rest of the world is watching, waiting, for another revolution.  The intended scope of the most recent reforms seems to almost be panacea, and transparency is the first step.

The next Revolution is happening in Boston, fittingly.  Progress Revolution 2011, from September 19^ththrough the 22^nd, offers the chance to learn from industry innovators on how they have successfully tackled these challenges within the capital markets.  Customers including PLUS Markets and Morgan Stanley will be there to share success stories.  And Kevin McPartland, Principal at the TABB Group, will be there too.  I’ve included a sneak peek into Kevin’s “Path to Transparency” below.

According to the New York Times, at the Republican Convention in 2008, Rudy Giuliani once said while contemplating Barack Obama’s candidacy, “… ‘change’ is not a destination ... just as ‘hope’ is not a strategy.”  Rudy will be speaking at our Revolution too.  Will you be there?  It will be a lively conference – I hope that you can join us!

-Dan

The Path to Transparency

By Kevin McPartland, Principal, TABB Group

Managing the vast quantities of data born into existence by the Dodd Frank Act and related regulation will present a challenge in the post-DFA environment; but collecting and producing the required data is just the tip of the iceberg. The ability to analyze and act on that data is what will separate the survivors from the winners. This is already true in many other parts of the global financial markets, but the complexities inherent in swaps trading coupled with the speed at which these changes will take place creates unique challenges. Spread this across all five major asset classes and three major geographies, and the complexities become more pronounced.

Margin calculations are proving to be one of the biggest concerns for those revamping their OTC derivatives infrastructure. In a non-cleared world, dealers determine collateral requirements for each client and collect variation margin on a periodic schedule—in some cases once a month, and in other cases once a year. When those swaps are moved to a cleared environment, margin calculations will need to occur at least daily. The result is an upgrade of the current batch process with dozens of inputs to a near-real time process, with hundreds of inputs. Whereas before major dealers could perform margin analysis, client reporting and risk management in a single system, those systems now need to operate independently within an infrastructure that provides the necessary capacity and speed.

The trading desk will require a similar seismic shift, as flow businesses will provide liquidity across multiple trading venues to an expanding client base. Most major dealers are at some stage of developing liquidity aggregation technology intended to provide a single view of liquidity across multiple swap execution venues. Creating this type of virtual order book requires receiving multiple real-time data feeds and aggregating the bids and offers in real time.

Furthermore, rather than comparing model-derived prices to the last trade price to produce quotes, inputs from SEFs, CCPs, SDRs, internal models, third-party models and market data providers will be required inputs to real-time trading algorithms once reserved for exchange-traded derivatives.

Providing clients with execution services presents other challenges. Executing on multiple platforms also means tracking and applying commission rates per client per venue in real time. Trade allocations also complicate the execution process.  In the bilateral world a big asset manager can do a $100 million interest rate swap and spread that exposure across multiple funds as it sees fit. Under the DFA, the executing broker must know which funds are getting how much exposure. Account allocation in and of itself is not new, but cost averaging multiple swap trades and allocating the right exposure at the right price to the proper account presents complex challenges, especially in a near-real time environment.

Risk management, compliance and back-testing data will also require huge increases in processing power, often at lower latencies. Risk models and stress tests, for example, are much more robust than they were before the financial crisis, requiring a considerably higher amount of historical data.

Compliance departments now must store the requisite seven years of data so they can reconstruct any trade at any moment in the past. This is complicated enough in listed markets, when every market data tick must be stored, but for fixed-income securities and other swaps, storing the needed curves means that billions of records must not only be filed away but retrievable on demand. Similar concerns exist for quants back-testing their latest trading strategies: It is not only the new data being generated that must be dealt with. Existing data, too, is about to see a huge uptick in requirements.

In the end these changes should achieve some of the goals set forth by Congress as they enacted Dodd Frank – increased transparency and reduced systemic risk.  The road there will be bumpy and expensive, but the opportunities created by both the journey and the destination will outweigh any short term pain.

This perspective was taken from the recent TABB Group study Technology and Financial Reform: Data, Derivatives and Decision Making.

 

Do you know Dr. John Bates?

If you don’t, get to know him. Though not a native of Massachusetts, it’s safe to say, “he’s wicked smaaht”. Not only is he smart, he’s really a genuine, nice person.  Recently, Dr. John Bates was named as one of the Top 10 Innovators of the Decade for Capital Markets, in which he has an extensive background. He helped pioneer new techniques in algorithmic and high frequency trading, real-time risk, and market surveillance. He was also a co-founder of Apama, a complex event processing (CEP) technology provider that Progress Software acquired in 2005.

Last year John became a member of the newly established Technology Advisory Committee (TAC) for the US Commodity Futures Trading Commission (CFTC). The CFTC is an independent agency with the mandate to regulate commodity futures and options markets in the United States. Most recently, he joined the blog roll over at the Huffington Post – his most recent post is From Icebergs to Autos, Effects of the Japan Earthquake Are Long-Lasting.

If you haven’t already, get to know John. I promise you, he’s a man worth knowing professionally, and if you are lucky, personally.

• Follow him on Twitter (@drjohnbates)
• See if he’ll confirm you as a friend on Facebook
• Watch him on YouTube
• Read what he has to say on our Apama and Business Making Progress blogs
• Listen to his CNBC interview Is a 'Splash Crash' Next?
• Check out his Executive Profile on Boston Business Journal

An Algorithmic Trading and Market Surveillance Wrap Up

Our Capital Markets and Progress Apama teams have been BUSY! Today many of them are recovering from a busy week at the SIFMA Financial Services Technology Expo in New York City.

In addition to lots of greeting and Tweeting, Dan Hubscher even had some time to post a couple blog posts:

• Tickets Please: Technology to Keep You on the Train
• Keeping the Train on Track

And while Dan helped man the floor, our VP of Corporate Communications, John Stewart, worked to get 3 press releases out onto the BusinessWire, including:

• Progress Software and Activ Financial Introduce New Market Data Adapter for Apama Capital Markets Foundation
• Progress Software Survey Reveals the Realities of Regulation, Monitoring and Algorithms on the OTC Derivatives Market
• Progress Software Launches Enhanced Market Surveillance and Monitoring Solution

Not only that, our own Dr. John Bates was tagged by Wall Street & Technology as one of our "Top 10 Innovators of the Decade for Capital Markets”.

Across the pond and beyond, Dr. Richard Bentley was quoted in the Bobsguide article “Suspect movements in share price fall to an eight-year low”. Dr. Giles Nelson traveled to India to promote Progress’ business in Capital Markets. He shared his thoughts on our complex event processing (apama.typepad.com) blog:

• The rise of algo trading in Asia - first stop Mumbai
• Still big room for growth in Japan

Phew! And, just in case you missed it, we wrapped up posting a 4 Part video series on Financial Regulation and Market Surveillance. Here are the blog posts that provide a brief overview and link to the videos:

• PLUS Stock Exchange Making Progress Around Regulation
• Using technology to prepare for regulatory change: how can market surveillance technologies help?
• Preparing for changes in the regulatory approach
• Cutting through the confusion of financial regulation

 

Responsiveness in Retail Banking

A general theme for this blog is how organisations are having to become more responsive, whether to customers, competition, regulation or to squeeze further operational efficiencies out of processes. I want to talk about some of the likely areas of innovation in retail and wholesale banking that will make these organisations more responsive.

Regulation is one obvious area where banks, over a multi-year period, are going to have to become more adept at dealing with change. The implications of the Dodd-Frank legislation in the US is still being understood and, in the UK, banks may be facing an almost existential threat if one gives credence to the rhetoric currently coming out from government and regulators.

Regulation and compliance with regulation is only going to become more and more important. This is being recognised by non-banking institutions that work in financial services. Thomson Reuters, for example, recently announced the formation of a Governance, Risk and Compliance division to deliver information solutions to those needing to comply with regulation. Useful certainly, but regulation will always manifest itself in different ways in different banks. The processes that support regulation must be able to change on a frequent basis. Applications set in concrete only allow this to occur slowly and expensively. The method of building applications needs to be responsive itself and needs to focus around dealing with complex events, business rules, workflow and user interfaces, not around programming language coding.

As an example, a bank, now a customer of Progress Software, had to deal with complying with new regulatory requirements in a matter of weeks. This was not just a box-ticking exercise – the regulator wanted visible demonstration of the systems that had been put in place. The bank’s existing application was simply too inflexible to be changed for reasonable cost and in the time required. An alternative approach, based on Business Process Management and event processing technology was selected which allowed the compliance process flow to evolve and change over time in a much more dynamic way and which could be tailored to meet the bank’s own unique combination of circumstances.

Regulation isn’t a nice to have or something aspirational. It’s a must-have – the risk of legal sanction makes it so.

Another focus for this year will be customer experience. Generally speaking, banks have been behind other industries in getting more responsive to customers’ individual needs and how they’re actually interacting with their bank. A recent US survey, by the industry analyst firm AITE, found that only 22% of small businesses were “extremely” satisfied with their bank and that 65% of larger corporates believed that banks did a bad job of understanding their needs.

A personal anecdote will illustrate a wider point. Recently, I moved money from a savings account with my usual bank to one paying a higher rate of interest with a competitor. The first bank finally contacted me about why I wasn’t using my savings account, but only after all the money had exited the account. By then it was simply too late. Banks still haven’t got sophisticated enough about monitoring how their customers are interacting with their accounts, online, by telephone etc., and sensitively interpreting what these actions might mean and responding in a timely fashion. Again, a watchword here is responsiveness.

Customer onboarding, the process of dealing with a customer’s application for a loan, credit card etc., has got some attention, both to improve the customer’s experience but also to increase the operational efficiency of the bank’s processes.  Some banks have now a real-time view of these processes and can determine immediately whether a high-value business loan should be treated as a greater priority than a car loan or whether a number of card applications have been spending too long receiving credit checks. By knowing this kind of information now (rather than often days or weeks hence) is vital to spotting exceptions quickly and re-prioritizing resources.

One of the core services that a bank performs is payments, whether these payments are executed using cards, direct bank transfer, cheque or otherwise. This year might see some significant innovations in payments processing which will require banks to respond in a way they’ve not been forced to previously. A key tipping point may be Apple introducing a near field communications (NFC) chip into the next iPhone, expected to be released about mid-year. This will allow an iPhone to be swiped across a store terminal to pay for goods. This isn’t that new. Particularly in Japan, NFC chips have been built into mobile phones for some time. However, Apple has a current habit of energising markets and it doesn’t just have the iPhone. There are 160m iTunes accounts which already handle payments. Google and Paypal are also considering offering NFC services. The question is, will this really disrupt existing payment systems which still, even in Paypal’s case, rely upon the core payment infrastructure provided by, primarily, banks? We should hope so. Banks have been hopelessly slow at innovating in payments. It took a diktat from the UK regulator to introduce “faster payments” into the UK. Still too many payments take 3 days, which, in today’s world is very slow for any kind of transaction. Cross-border payments in Europe are still slow and expensive.

If new technology does force payments innovation, banks will be forced to keep up by increasing the flexibility and speed of their own infrastructures to deal with, potentially, many more smaller payments. Guess what? They will need to make them more responsive. If they’re not able to move quickly banks may end up simply being sending round the larger aggregated payments resulting from all the transactions occurring using more modern platforms. Cost pressures will also be present. A recent Boston Consulting Group report indicates that payments providers need to reduce costs by between 10% and 35% by 2012 to keep cost-income ratios stable.

Retail and wholesale banking may often move slowly, but, through regulation, customer pressure and new-entrant innovation, expect some significant changes this year. As Chris Skinner, omnipresent observer of all things banking has recently said on his blog, banks will have to learn “how to be real-time nimble in a world of change”. 

(This first appeared as an opinion column in cio.co.uk)

Red Flags in Morning, Firms Take Warning

A pattern is emerging within new financial services regulations where regulators and financial services firms deploy monitoring technology to "red flag" potential issues such as risk, position limits, errors and manipulation. The "red flags" raised would then alert the relevant personnel or authorities.

In the case of the Volcker Rule, prohibiting banks from proprietary trading and investing in or sponsoring hedge funds or private equity funds, the authorities would use a three tiered approach (http://tinyurl.com/2bh9ot3).  First "tripwires", such as the length of time a trader holds a position, its size or riskiness, would alert banks’ compliance departments  who would (#2) quiz the trader on the nature of the position. And (#3)regulators that keep inspectors on banks’ premises would see the tripwires and monitor both traders and compliance departments.

Over at the CFTC, regulators are looking at a similar approach to monitoring and controlling position limits on products such as oil and metals with a "points" system that would give the CFTC monthly reports that it could use to red-flag traders with large positions (http://tinyurl.com/2ugbdh6).

The tracking and red flag approach is the latest step in increased monitoring of trading operations with the ability to take response before it’s too late. At Progress, we have been advocating using monitoring and surveillance technology to help catch inside trading and avoid fat fingered trading errors for years. With new regulations, monitoring becomes not only mandated but more complicated. Red flags are likely to be flying all over the place within as little as months, both inside and outside financial services firms, presenting a fine opportunity for our Responsive Process Management software solution.

As the financial services world becomes more compliant, the ability to manage red flags becomes more critical. Every process within a financial services firm must be scrutinized, from trade entry to risk management, to analyse and understand internal and external events. This take sophisticated technology. This is where Progress Software's RPM software fits in. According to technology research firm Ovum: "Unless an organization has already made a significant investment in creating an operational responsiveness solution around best of breed products, it will be worth seriously considering the competitive advantage and improved effectiveness that could be achieved by deploying RPM."

Ovum noted in a Technology Audit note that multiple technologies are required to gain a comprehensive insight and respond more rapidly to changes to the environment. These include: business process management (BPM) to model, implement, and execute the processes; business analytics to determine how effectively the processes are working; complex event processing (CEP) to understand the implications of many streams of internal and external events; business rules management to determine the appropriate actions for a given set of conditions and variables; and visibility into end-to-end transactions to track and audit their progress.

The interrelationships between all of these components and the vast amount of information that has become available must be understood before its impact on processes can be ascertained and appropriate tuning performed. In other words, RPM is the answer.

RPM can monitor an increasing number of information feeds, both within or external to the organization, then apply business policy and governance rules, then automatically tune the  established process or alert a human decision-maker (if necessary) and present him/her with current, relevant information on which to base the most appropriate response.

According to Ovum: "All of these individual capabilities already exist (at different levels of maturity), but the cost and complexity of integrating these into an effective business solution is beyond the means of most organizations. Hence Ovum believes that the requirement identified by Progress represents a genuine market opportunity." Well said. 

 

Stamford Bridge, here we come

Tomorrow sees Progress Software taking over Stamford Bridge, home ground to the world-famous Chelsea Football Club. We’re not just there to check out the players’ dressing rooms – we are being joined by James Caan, of Dragons' Den fame, as well as the great and the good of the UK business community, to discuss how businesses can start to make decisions based on foresight, not hindsight, in their operations.

Gordon Penfold, Chief Technology Officer at British Airways, will be sharing his insight on ‘operational foresight’, revealing how the organization has set itself up to better deal with the irregular operations that have become a fact of life in the last year. And Mike Gualtieri, senior analyst at Forrester Research, will be sharing his views on where the next wave of truly responsive business management is coming from, and which trends to watch for. And Progress' own Chief Executive Officer, Rick Reidy, will be giving a keynote too.

I'll be there, speaking in one session but also blogging and tweeting from the event. So watch this space for the latest updates.

For those of you attending, I look forward to seeing you there.

www.progresssoftwaresummit.com

 

How Being Complex Makes Transaction Assurance Simpler

I have been seeing an increasing amount on interest in the marriage between Business Transaction Management (BTM) and Complex Event Processing (CEP). On July 29^th Dr Dobbs Journal published an article called Complex Event Processing: IT Liberator or Over-Engineering Hell? This article was about the synergy of BTM and CEP (although I felt it was rather biased towards one company). Also, last week Jean Pierre Garbani at Forrester published this blog in which he discussed the evolution towards BTM and CEP working together.

Business Transaction Management is a rapidly growing area of Application Performance Management (APM). BTM enables users to look into the transaction flows within their business and ensure everything is running as expected. BTM enables problems in transaction flows to be discovered – such as a bottleneck in an important business process. The really appealing aspect of BTM is it can do this without the need to change the applications in the business; BTM can “discover the transaction flows” by tapping non-intrusively into the flows going through application servers, middleware buses, business process management systems and other systems within the environment. Over time, BTM can build up a picture of the environment’s business flows, look inside the transactions and flag up immediately problems that can really hurt the business.  Thus BTM works really well in legacy environments – not just modern SOA environments. And of course it appeals to business executives and operations users – not just IT users.

Complex Event Processing is the ability to correlate events flowing through a business  - to identify patterns in real-time. These patterns might indicate opportunities and/or threats to the business that have just happened, are in the process of happening or are likely to happen right now. Events are occurrences in the business, such as stock market quotes in trading, call data records being generated in communications or packages changing location in logistics. An example of a real-time opportunity is a trading “statistical arbitrage” opportunity – to sell one instrument and buy another at a micro profit; another is the ability to upsell something to a customer who has just purchased an item on their credit card – based on their spending and buying patterns, their location and context. Threats to be detected include risk exceeding a certain key level in a bank or gaming fraud occurring in a casino. This kind of business level visibility and immediate response also appeals to business users as well as IT.

Listening to the descriptions of BTM and CEP, does it sound like there is a little overlap? Well there is some. What BTM is really good at is non-intrusively discovering process endpoints and the events they exchange – and then tracking these events. What CEP is really good at is correlating complex real-time business events in real-time, including arbitrary user-defined patterns, which can evolve over time as the business evolves. So it makes perfect sense to put these capabilities of BTM and CEP together. For BTM this strengthens the real-time correlation and pattern detection capabilities. For CEP this enables discovery of services without the need to do expensive and time-consuming instrumentation of the environment.

At Progress we have two leading products in the BTM and CEP categories: Actional and Apama. We believe that BTM and CEP capabilities are converging for certain business use cases, so as part of our Responsive Process Management (RPM) suite we now provide seamless integration between these capabilities. Of course RPM does much more than that. More on that later!

Evacuate the Dancefloor

I just posted a blog entry on how changes in capital markets regulations may lead to out of work traders joining hedge funds. It may be a culture shock without the big bank budgets - but advanced trading technology is not out of reach.

See the full article here: "Evacuate the Dancefloor".

The Busy "B" in BRICS

I just published a blog posting on how Brazil has seen booming growth in algorithmic trading over the last couple of year - with Progress Software right at the heart of it:

See the full link here

Algorithmic Terrorism

I just posted a blog on the potential of algorithmic trading terrorism -- can a "denial of service" style attack cripple world markets? See the full posting here:

Blog Post: Algorithmic Terrorism >

Mission Operational Responsiveness: Progress RPM and Fraud Prevention

Imagine that you’re a Fortune 500 diversified bank. You have millions of customers worldwide using your credit cards to make purchases every day.

As a diversified bank, your customers expect great value and convenience every time they complete a transaction with you. To retain existing customers and obtain new ones, you are committed to delivering a convenient experience that meets your customers’ high expectations. Whether they have a credit card or savings account, you want their interactions to be seamless as they occur through your website, at ATMs, through merchants and in your branch locations.

Sometimes, things go wrong.

Diversified banks must balance delivering a convenient experience that meets customers’ expectations while continuously monitoring transactions in an effort to prevent bank fraud.

Meet Agent O and relive his fraud prevention adventure as he strives to monitor millions of transactions, when suddenly things go awry. Watch him combat the Syndrome crime family when they hack into ACME Trading Company’s network, stealing thousands of credit card numbers.

Will the Progress® Responsive Process Management (RPM) suite help Agent O stop the crime in time? Watch the video to find out, as the RPM suite is put to the test.

And then tell Progress how you can use RPM to become a business hero and enter to win an Apple iPad.

Smart - But Is It Smart Enough?

Today Nasdaq group purchased Smarts - a provider of market surveillance. This is an interesting development . Read the full post on our Apama blog :

Smart- But is it Smart Enough >

Beware the weight-challenged digits

Fat fingers (or weight-challenged digits - for the more politically correct :-) ) are trading errors that can have catastrophic consequences. And they've been happening a lot recently!!

Read my full blog post here.

India: Big Potential for Algorithmic Trading

I spent last week in India, a country that, by any standards, is growing fast.  Its population has doubled in the last 40 years to 1.2B and economic growth has averaged more than 7% per year since 1997.  It’s projected to grow at more than 8% in 2010. By some measures, India has the 4th biggest economy in the world. 

Progress Software has a significant presence in India. In fact, people-wise, it’s the biggest territory for Progress outside the US with over 350 people. Hyderabad is home to a big development centre and Mumbai (Bombay) has sales, marketing and a professional services team.

The primary purpose of my visit was to support an event Progress organised in Mumbai on Thursday of last week on the subject of algorithmic trading. It was also our first real launch of Progress and Apama, our Complex Event Processing (CEP) platform, into the Indian capital markets. We had a great turnout, with over 100 people turning up. I spoke about what we did in capital markets and then participated in a panel session where I was joined by the CTO of the National Stock Exchange, the biggest in India, a senior director of SEBI, the regulator, and representatives from Nomura and Citigroup. A lively debate ensued.

The use of algorithmic trading is still fairly nascent in India, but I believe it has a big future. I’ll explain why soon, but I’d like first to give some background on the Indian electronic trading market, particularly the equities market, which is the largest.

Watch my Interview on NDTV Profit >

The market: India has several, competing markets for equities, futures and options, commodities and foreign exchange too.  In equities, the biggest turnover markets are run by the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), with market shares (in the number of trades) of 74% and 26% respectively. Two more equity exchanges are planning to go live soon – the Delhi Stock Exchange is planning to relaunch and MCX is also currently awaiting a licence to launch. This multi-market model, only recently adopted in Europe for example, has been in place in India for many years.

It was only two years ago that direct market access (DMA) to exchanges was allowed. Although official figures don’t exist, the consensus opinion is that about 5% of volume in equities is traded algorithmically and between 15% and 25% in futures and options. Regulation in India is strong - no exchange allows naked access and the BSE described to me some of the strongest pre-trade risk controls I’ve come across - collateral checks on every order before they are matched. The NSE has throttling controls which imposes a limit on the number of orders a member organisation can submit per second. Members can be suspended from trading intra-day if this is exceeded. The NSE also forces organisations who want to use algorithms to go through an approval process. I’ll say more about this later. Controversially, the NSE will not allow multi-exchange algorithmic strategies so cross-exchange arbitrage and smart-order routing cannot take place. Lastly, a securities transaction tax (STT) is levied on all securities sales.

So, with the above restrictions, why do I think that the Indian market for algorithmic trading has massive potential?

The potential: The Indian market is very big. Surprisingly so to many people. Taking figures from the World Federation of Stock Exchanges (thus I’m not counting trading on alternative equity venues such as European multi-lateral trading facilities), the Indian market, in dollar value, may still be relatively modest – it’s the 10th largest. However, when you look at the number of trades, India’s the 3rd largest market, only beaten by the US and China. The NSE, for example, processes 10 times the number of trades as the London Stock Exchange. So why isn’t more traded in dollar terms? That’s because trade sizes on Indian exchanges are very small. The median figure worldwide is about $10K per trade. The figure in India is about $500 per trade, a 20th of the size. In summary, surely the task of taming the complexity of this number of trades and the orders that go with them is ideal for algorithmic trading to give an edge? To compare to another emerging, “BRIC”, economy, that of Brazil, where the number of firms using Apama has gone from zero to over 20 in as many months, the dollar market size is fairly similar but the number of equity trades in India is 33 times more. The potential in India is therefore enormous.

India is already there in other ways. All exchanges are offering co-location facilities for their members and debate has already moved on to that common in more developed markets on whether this gives certain firms an unfair advantage or not and whether co-location provision should be regulated.

The challenges: There are some difficulties. The STT is seen by some as an inhibitor. However, its effect is offset somewhat by the fact that securities traded on exchange are not subject to capital gains tax.

The NSE process for approving algorithms is more controversial. Firms that want to algorithmically trade must show to the NSE that certain risk safeguards are in place and “demonstrate” the algorithm to the exchange. As the biggest exchange, the NSE wields considerable power and thus its decision to vet algorithms puts a brake on market development. I believe this process to be unsustainable for the following reasons:

1. As the market develops there will simply be too many algorithms for the NSE to deal with in any reasonable timeframe. Yes, India is a low-cost economy, but you need highly trained people to be able to analyse algorithmic trading systems. You can’t simply throw more people at this. Firms will want to change the way algorithms work on a regular basis. They can’t do this, with this process in place.
2. It raises intellectual property issues. Brokers will increasingly object to revealing parts of their algorithms and their clients, who may want to run their alpha seeking algorithms on a broker-supplied co-location facility, will most definitely object.
3. It puts the NSE in an invidious position. Eventually an algo will “pass” the process and then go wrong, perhaps adversely affecting the whole market. The NSE will have to take some of the blame.
4. Competition will force the NSE’s hand. The BSE is trying to aggressively take back market share and other exchanges are launching which will not have these restrictions.

It strikes me that the NSE should spend its efforts into ensuring that it protects itself better. Perhaps a reasonable comparison is a Web site protecting itself from hacking and denial of service attacks. If they can do it, so can an exchange. And it would offer much better protection for the exchange and the market in general.

In conclusion: I’m convinced of the growth potential in India for algorithmic trading. The market is large, the user base is still relatively small and many of the regulatory and technical prerequisites are in place. There are some inhibitors, outlined above, but I don’t think they’ll hold the market back significantly. And finally, why should India not adopt algo trading when so many other, and diverse, markets have?

Progress has its first customers already in India. I look forward to many more.

Defending Against the Algo Pirates

It was an honor to sit on the CFTC Technology Advisory Committee (TAC) last week. The CFTC is the US regulator for derivatives trading – which is a big area. The topic of the first meeting of the TAC was to understand Algorithmic and High Frequency Trading – and its impact on the market. The CFTC is sensibly trying to understand where they should regulate and where they should propose best practices. Obviously the memory of the "flash crash" is still fresh in everyone's mind. One of the topics of interest was that of pirate algorithms that attack other algorithms and try to manipulate the market. I’ve just written a blog posting on it if you’d like to read more:

Full Blog Post: Defending Against the Algo Pirates

CFTC Launches Technology Advisory Committee

Yesterday the CFTC, the regulator in charge of Futures and Options markets, announced a new Technology Advisory Committee (TAC), chaired by the very capable Commissioner Scott O’Malia. Read the complete article.

I am absolutely delighted to be included in the group of experts that the CFTC has called together to form the TAC. I am joined by an extraordinary group of some of the industry's top executives from banks, brokers, trading firms, exchanges and clearing firms as well as some very impressive academics. On Wednesday, July 14th (tomorrow as I write), we will meet to discuss the impact of high frequency and algorithmic trading on the markets, including whether algorithms may be implicated in the May 6th 'flash crash'. From this, we’ll discuss what recommendations we have for regulation of and/or best practices for algorithmic and high frequency trading.

High frequency and algorithmic trading are essential for efficient execution and alpha generation in a complex, multi-asset, fast-moving world. However, there are a number of accusations that have been made against these forms of trading, including that they may aggravate volatility and may even have caused the ‘flash crash’. I believe evidence from the TAC participants will exonerate the accused.

I am hoping that our meetings will result in solutions that not only head-off future ‘flash crashes’, but also help exchanges, banks and brokers to better monitor and police trades. The proactive use of real-time monitoring systems can alert regulators to problems before they become a crisis. Monitoring technology can 'see' major price and volume spikes in particular instruments, how often they happen and maybe even why, and whether a pattern in market behavior caused them. It can also tell how much trading is potentially market abuse, for example, insider trading might be detected by correlating unusual trading incidents with news releases and market movements. (The FSA, for example, thinks that 30% of trading around acquisitions is insider.)

It is now possible to apply high frequency techniques to not just trading – but also to market monitoring, surveillance and pre-trade risk checks – for regulators, exchanges and brokers. The technology is out there (with proven approaches built on next generation platforms such as complex event processing or CEP) and it needn't be expensive. The CFTC's TAC is a positive step in the right direction. I look forward to the meeting and will let you know how it goes! Follow me on Twitter @drjohnbates where I'll Tweet when possible.

BPM in Financial Services

A few weeks back we attended the SIFMA Financial Services Technology Expo in New York City. Though I wasn’t able to attend, the rumors in the hallways are that it was a very successful, and fun, event. Bummed I missed it!

However, while our Capital Markets team was busy talking to customers, meeting with analysts and press, and Tweeting from the SIFMA event floor, I was back at the headquarters working on publishing the new Savvion solution brief, Improving Business Processes in Financial Services. This solution brief describes how processes are typically implemented in financial services firms today and how Progress® Savvion™ business process management (BPM) solutions can put people in the center of the process, enabling collaboration, control, and ongoing refinement. This 13 page paper presents ideas on how you can improve a few of the most important processes faced by the financial services industry, including:

• New account initiation;
• Loan and insurance policy origination and underwriting;
• Loan and insurance policy servicing;
• Dispute/claims resolution;
• Regulatory compliance and risk management.

Read the entire brief >

SIFMA Highlights

In case you too were unable to attend SIFMA this year, here are just a few of our highlights:

** New Capital Markets Foundation announced!
** People who dropped by our booth were eligible to win an iPad if they completed a short survey. Survey results are forthcoming!
** New generation of our Market Surveillance Accelerator announced!
** For thirsty attendees we hosted two "refreshment" events which generated lots of traffic and great conversation.
** RPM in Financial Services white paper released.

What do you do with the drunken trader?

The news that Steven Perkins, (former) oil futures broker in the London office of PVM Oil Futures, has been fined 72,000 pounds ($108,400) by the FSA and banned from working in the industry is no surprise, see article here.

It could have been worse given that the broker, after a few days of heavy drinking, took on a 7.0 million barrel long position on crude oil in the middle of the night. The fine seems miniscule since it cost PVM somewhere in the vicinity of $10 million - after unwinding the $500+ million position.

The surprising thing about this incident is that it happened at all. Perkins was a broker, not a trader. He acted on behalf of traders, placing orders on the Intercontinental Exchange among other places. That he could go into the trading system and sneak through 7.0 million barrels without a customer on the other side is unbelievable.

Heavy drinking is practically a job requirement in the oil industry, my sources tell me, so this kind of thing could be a real issue going forward. As algorithmic trading takes hold in the energy markets, trading may approach the ultra high speeds seen in equities markets.  This is a recipe for super high speed disaster, unless there are proper controls in place - especially if there were a way for the broker or trader in question to enrich himself in the process.

One powerful way to prevent this kind of accident or fraud is through the use of stringent pre-trade risk controls. The benefits of being able to pro-actively monitor trades include catching "fat fingered" errors, preventing trading limits from being breached, and even warning brokers and regulators of potential fraud - all of which cost brokers, traders and regulators money. PVM is a good example of this.

Ultra-low-latency pre-trade risk management can be achieved by brokers without compromising speed of access.  One solution is a low latency "risk firewall" utilizing complex event processing as its core, which can be benchmarked in the low microseconds.  Errors can be caught in real-time, before they can reach the exchange. Heaving that drunken trader right overboard, and his trades into the bin.

Banks & Bullets: Maybe They Dodged One - But Still Needs Some Silver Ones!

By now you’ve probably seen that a deal was reached this morning by the House and Senate on regulation. Some would say it waters down provisions from the tougher Senate bill, limiting rather than prohibiting banks to trade derivatives and invest in hedge funds. This articles describes it as banks “dodging a bullet” http://www.businessweek.com/news/2010-06-25/banks-dodged-a-bullet-as-u-s-congress-dilutes-trading-rules.html

We applaud the superhuman efforts put into the new financial regulation bill by the U.S. Congress and the House of Representatives. However, as I’ve said many times, transparency and consistency are critical to successful regulation in the capital markets. One could be forgiven for fearing that the watering down of the regulations, including the Volcker Rule, may create more havoc rather than increase transparency and consistency.

One thing is for sure – there’s going to be a raising of the priority on handling the complexity and requirement for real-time risk and surveillance within institutions. Risk managers and C-level executives concerned about minimizing risk and maximizing capital will need to view trading positions and limits across the firm, including, if permitted, derivatives that are 'spun out'. Ideally the risks should be aggregated and analyzed, in real-time, giving the ability to detect and prevent “accidents”. Pre-trade risk management will be increasingly important, as firms seek to maintain capital requirements at all times.

A top-down approach to risk where managers can see, in a single view on a dashboard, the risks across all asset class silos has gone from a “nice to have” to high on the wish list – but many still wonder if it actually possible. Continual monitoring of trades in real-time can help to prevent exceeding trading limits, prevent mistakes and catch market abuse.

p.s. Many thanks to all the comments from market practitioners who comment that technology can't solve all the problems for Regulators, Banks and Trading Venues. I completely agree! But we can go a lot further than what happens right now. But of course technology is only one of the approaches. Changes in regulation is another, as is increased transparency, improved reporting (e.g. from fax to real-time data!) etc. etc. 

Rogue Trading Below the Radar

Jerome Kerviel, the trader who allegedly lost Societe Generale nearly 5.0 million euros, went on trial in Paris on Tuesday, June 8th. The bank alleges that Kerviel took "massive fraudulent directional positions" in 2007 and 2008, which were far beyond his trading limits.

It is interesting to note that Kerviel was not only experienced on the trading floor, but he also had a background in middle office risk management technology. It may have been this knowledge that enabled him to manipulate the bank's risk controls and thus escape notice for so long.

Still, it is perplexing that fraud on such a scale can go on without detection for so long, even if Kerviel did have an insider's knowledge of the firm's risk management systems. Internal risk controls are not something that a financial firm can take for granted, left to run unchecked or unchanged for months or years.

The detection of criminal fraud or market abuse is something that must happen in real-time, before any suspicious behaviour has a chance to lose a firm money or to move the market. Pre-trade risk management is paramount, with trading limits specified and checked in real-time. Internal controls should be monitored for possible manipulation, again in real-time. The good news is that technology does exist in the form of real-time market surveillance software from companies can analyse data transactions by the millisecond.

Financial institutions need to start looking inward to improve standards, regardless of current regulation. Otherwise the culture of greed and financial gain at all costs will encourage more and more Kerviels.

FSA Loses Insider Trading Case - but more to come...

Today’s insider trading cases acquittals in London are a big blow to the FSA, but their ability to detect and prosecute these market abusers cannot be overlooked. Without the technology to detect the trading anomalies, alleged white collar criminals cannot be prosecuted in the first place.

It’s also clear that the FSA is sending a message to the investment community: shape up or be prepared to pay. The £33.32 million ($48.8 million) fine for JPMorgan is the largest in the FSA’s history. 

As the SEC and CFTC in the US looks to adopt market surveillance technology, it will be interesting to see the potential rise in insider trading court cases and the size of fines in the US.

I think we're going to see a lot more of this type of prosecution around the world. The FSA is currently prosecuting 11 people for alleged market abuse.

As you may have read this week (link here -> http://bit.ly/aslFmV), the FSA is using new technology to crack down on potential market abusers. in the UK, the FSA receives 6m-8m transaction reports daily. The FSA will soon even have a system in place that will automatically alert staff to potential abuse in “real time”. Alexander Justham, the FSA’s director of markets, says the use of such “complex event processing” technology will give the FSA “a more proactive, machine-on-machine approach” to surveillance.

 
See the article "FSA Loses Insider-Trading Case" here
http://online.wsj.com/article/SB10001424052748704025304575284033106574578.html?mod=WSJ_hps_LEFTWhatsNews

Optimism in the world of financial services regulation

It seems that we’re finally making some progress on making the financial markets function more safely. 

After the “flash-crash” of 6 May, US equity market operators have agreed to bring in coordinated circuit-breakers to avoid a repeat of this extreme event. There is widespread agreement on this. Industry leaders from brokers and exchanges yesterday made supportive statements as part of submissions to the SEC.

Regulators are going public with their use of real-time monitoring technology. Alexander Justham, director of markets at the Financial Services Authority, the UK regulator, told the Financial Times that the use of complex event processing technology will give the FSA “a more proactive machine-on–machine approach” to market surveillance (the FSA is a Progress customer). Other regulators are at least admitting they have a lot of work to do. Mary Schapiro, the SEC chair, believes that the technology used for monitoring markets is “as much as two decades behind the technology currently used by those we regulate”. Scott O’Malia, a commissioner at the Commodity Futures Trading Commission admitted that the CTFC continues to receive account data by fax which then has to be manually entered. 

The use of real-time pre-trade risk technology is likely to become much more widespread. “Naked” access, where customers of brokers submit orders directly to the market without any pre-trade checks, is likely to be banned. This is an important change as late last year Aite Group, an analyst firm, estimated that naked access accounted for 38% of the average daily volume in US stocks. The SEC is also proposing that regulation of sponsored access is shorn up – currently it has evidence that brokers rely upon oral assurances that the customer itself has pre-trade risk technology deployed. The mandated use of pre-trade risk technology will level the playing field and will prevent a rush to the bottom. Personally I’ve heard of several instances of buy-side customers insisting to brokers that pre-trade risk controls are turned off as they perceive that such controls add latency and therefore will adversely affect the success of their trading.

The idea of real-time market surveillance, particularly in complex, fragmented markets as exist in the US and Europe is gaining credence. The SEC has proposed bringing in a “consolidated audit trail” which would enable all orders in US equity markets to be tracked in real-time. As John Bates said in his previous blog post, it’s likely that the US tax-payer will not be happy paying the $4B the publically funded SEC estimates that such a system would need to get up and running. Perhaps the US could look at the way the UK’s FSA is funded. The FSA reports to government but is paid for by the firms it regulates.

As I mentioned in my last blog our polling in April at Tradetech, a European equities trading event, suggests that market participants are ready for better market monitoring. 75% of respondents to our survey believed that creating more transparency with real-time market monitoring was preferable to the introduction of restrictive new rules.

CESR, the Committee of European Securities Regulators, is currently consulting on issues such as algorithmic trading and high frequency trading. It will be interesting to see the results of their deliberations in the coming months.

I’m so pleased the argument has moved on. This time last year saw a protracted period of vilifying “high frequency trading” and “algo trading”. Now, there is recognition of the benefits as well as the challenges that high frequency trading has brought to equity markets and regulators seem to understand that to both prevent disastrous errors and deliberate market manipulation occurring it is better for them to get on board with new technology rather than try to turn the clock back to mediaeval times. 

New approaches are sorely needed. Yesterday saw the conclusion of another investigation into market manipulation when the FSA handed out a $150,000 fine and a five-year ban to a commodity futures broker.

Encouraging Noises from the SEC

Washington, D.C., May 26, 2010 — The Securities and Exchange Commission today proposed a new rule that would require the self-regulatory organizations (SROs) to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets. http://www.sec.gov/news/press/2010/2010-86.htm

I support the SEC's intention to improve real-time market surveillance and establish a consolidated audit trail system. It's always been a worry that regulators do not have real-time access to all securities market data, but it's good to see that they are about to address the issue.

The SEC estimates it would cost the trading industry $4 billion to implement and $2.1 billion in annual maintenance to establish this system. But the US taxpayer is already fed up with the government using 'their' dollars to bail out banks and shore up an ailing financial system. They are unlikely to cheerfully approve of another government agency getting billions more of their dollars.

However, I'm not sure the solution has to be so costly. The markets have come a long way with standard protocols like FIX but also ways of normalizing heterogeneous protocols in real-time. Time series database technology, to consolidate and retain all the information on quotes, orders and trades, has been scaling up for years to handle massive increases in volumes.  And low latency, high speed, monitoring technology exists and is already in place at some of these destination venues and trading participants.

I would love to see the SEC working together with other regulators, like CFTC to form a committee of market participants, exchanges, ECNs and market practitioners to hammer out a cost-effective and timely solution. May 6th could potentially happen again and the regulators must be prepared. I believe a solution could be achieved quickly and by using less taxpayer dollars than the SEC might initially think.

Is High Frequency Trading (HFT) Really Evil?

I was very interested in Tim Bass' response to my posting Regulation: Don’t Throw the Baby Out With the Bathwater. You can read Tim's post here but in summary he feels that "the US economy (read individual investors) would be much better off if financial services firms (or anyone) were not permitted to use computers next to stock exchanges to seek split second “get rich quick” opportunities that the normal, traditional investor does not have. The only “economy” that benefits are entities that participate in this type of activity, and the technology firms selling the hardware and software to make “all the madness” possible."

My response to Tim is as follows: I respect your views as always and understand where you're coming from. My view on this is that HFT is not driving the market big picture -- fundamentals will still do that. So people still invest in companies driven by good economics. HFT makes the market more efficient. And yes it does accentuate movements.

The point I was trying to make is that you can protect investors from some of the rapid movements that HFT can accentuate by having electronic safeguards -- like real-time pre-trade risk and real-time market surveillance.

Sure I want to sell people more software - but there's a bit more to it. If I didn't work for Progress I'd still feel the same way as I do.

On the other hand Colin Clark, who had a lot of experience in real-time surveillance with his company Kaskad, posts that he doesn't blame CEP and HFT for the Flash Crash. Instead he cites issues with NYSE and market fundamentals. See his post here.

This topic definitely insights strong opinions. A lot of bankers I know often don't feel safe even admitting they are bankers in public in case they get lynched for causing such suffering in the economy!! What do you think caused the Flash Crash? We set up a little vote which you can get to here.

Monitoring and surveillance: the route to market transparency

Again this week, capital markets is under the spotlight, with the SEC and Goldman standoff. Just a few weeks ago, the FSA and UK Serious Organised Crime Agency were making multiple arrests for insider trading. Earlier this year Credit Suisse were fined by the New York Stock Exchange for one of their algorithmic trading strategies damaging the market. Still, electronic trading topics such as dark pools, high frequency trading are being widely debated. The whole capital markets industry is under scrutiny like never before.

Technology can't solve all these problems, but one thing it can do is to help give much more market transparency. We're of the view that to restore confidence in capital markets, organisations involved in trading need to have a much more accurate, real-time view on what's going on. In this way, issues can be prevented or at least identified much more quickly.  I talked about this recently to the Financial Times, here. 

Last week at the Tradetech conference in London, Progress announced its release of a second generation Market Monitoring and Surveillance Solution Accelerator. This is aimed at trading organisations who want to monitor trading behaviour, whether to ensure compliance with risk limits for example, or to spot abusive patterns of trading behaviour. Brokers, exchanges and regulators are particularly relevant, but buy-side organisations can also benefit from it. Previously this solution accelerator just used Apama. Now it's been extended to use our Responsive Business Process (RPM) suite, which includes not only Apama, but Savvion Business Process Management, which extends the accelerator to give it powerful alert and case management capabilities. We know that monitoring and surveillance in capital markets is important now, and believe it will become more so, which is exactly why we've invested in building out product. You can read the take on this from the financial services analyst Adam Honore here and more from Progress about the accelerator and RPM. A video on the surveillance accelerator is here. 

As all this is so relevant at the moment and Tradetech is the largest trading event of its kind in Europe (although very equity focused), we thought we'd conduct some research with the participants. We got exactly 100 responses on one day (which made calculating the percentages rather a breeze) to a survey which asked about attitudes to European regulation, high frequency and algorithmic trading and dark pools. Some of the responses relating to market monitoring and surveillance are worth stating here. 75% of respondents agreed to the premise that creating more transparency with real-time trading monitoring systems was preferable to the introduction of new rules and regulations. 65% of respondents believe that European regulators should be sharing equity trading information in real-time. And more than half believe that their own organisation would support regulators having open, real-time access to information about the firm's trading activity. To me, that's a pretty strong sign that the industry wants to open up, rather than be subjected to draconian new rules.

There will be substantial changes to the European equity trading landscape in the coming year. There will be post MiFID regulation change by the European Commission acting on recommendations by the Committee of European Securities Regulators who are taking industry evidence at the moment. Their mantra, as chanted last week, is "transparency, transparency, transparency". Let's hope that this transparency argument is expressed in opening up markets to more monitoring rather than taking a, perhaps politically expedient, route of outlawing certain practices and restricting others.

Observations from Tradetech 2010

Day one of Tradetech Europe 2010 has nearly finished. I won't be here tomorrow, so here are some thoughts and take-aways from today's event.

It's fair to say that Tradetech is the premier European equities trading and technology event, and thus very relevant for Progress' business in capital markets, particularly customers using Apama. Progress has a substantial presence as always. It's a good event to meet brokers, hedge funds, exchanges and pretty much every one within the industry. Lots of old friends are here every year. Regarding the event itself, it's pretty well attended considering the recent issues with volcanic ash. It usually takes place in Paris, but I'm sure the organisers were pleased that they chose London this year as the London contingent was able to attend without disruption.

This years big theme really seems to be market structure and regulation. In the third year after MiFID, an event which brought competition into European equity markets, and after the credit crunch, issues about how the market is working, the influence of alternative venues such as dark pool,  and how high-frequency trading is affecting the market are issues front of mind.

What's interesting is how some things stay the same. Richard Balarkas, old Tradetech hand and CEO of Instinet Europe, talked about trading liberalisation in the late 19th and early 20th century. Then, vested interests were complaining about the rise of "bucket shops", giving access to trading on the Chicago Board of Trade via telegraph to people that wouldn't previously have traded. In the view of some at the time, this lead to speculation and "gambling". Regulators were wrestling at the time with the fact that only 1% of CBOT trades resulted in actual delivery of goods - the rest were purely financial transactions and therefore arguably speculative. This reminds me of some of the current debate around the "social usefullness" of high frequency trading which is going on now.

European equities trading has changed a lot. Vodafone, a UK listed stock, has now only about 30% of its average European daily volume traded on the London Stock Exchange (LSE). The rest is traded on alternative trading venues across Europe. However, Xavier Rolet, CEO of the LSE, believes that there's a long way to go. He stated  that "the European equities market remains anaemic when compared to the US". Volumes, adjusted for relative market capitalisation, are about 15% of that in the US.

Regulation of European markets is a thorny issue. Regulation is fragmented, together with the market itself. CESR - the Committee of European Securities Regulators, the nearest Europe has to a single regulator - is taking evidence on a whole range of issues and will recommend a set of reforms to the European Commission in July this year. These recommendations will relate to post-trade transparency and information quality and enhanced information about systematic internalisers and broker crossing systems. CESR is also looking at other issues such as algorithmic trading and co-location. Legislation will follow towards the end of 2010.

Equity markets are in a sensitive place. There's still more deregulation to do, more competition to be encouraged and yet, with sentiment as it is, regulators may decide to introduce more rules and regulations to prevent this taking place. The CESR proposals will be about "transparency, transparency, transparency" - as part of this we believe that more real-time market monitoring and surveillance by all participants is key to bringing back confidence in the markets and ensuring that draconian rules don't have to be introduced.

Emerging markets were talked about in one session, and Cathryn Lyall from BM&FBovespa in the UK, talked about Brazil in particular. We've seen Brazil become a pretty significant market recently. Not only have demand grown for all Progress products substantially but Apama is now being used by 18 clients for algorithmic trading of both equities and derivatives. Brazil is the gorilla in the Latin American region. It accounts for 90% of cash equities and 95% of derivatives business in Latin America. 90% of Brazilian trading is on exchange. Brazil emerged largely unscathed from the credit crunch and it's taken only 2-3 years to achieve the level of trading infrastructure that took perhaps 10-15 years to evolve in the US and Europe. More still needs to happen. Although the regulatory regime has an enviable reputation, it is moving slowly. Concerns regarding naked and sponsored access are holding up liberalisation that would lead to DMA and co-located access to the equities market, something which is place already for derivatives.

So, that's what I saw as highlights from the day. Tradetech seems, still, to be the place the whole industry gathers.

Predictions for increased transparency in Capital Markets

It is my view that one of the most significant causes of the global financial crisis was a lack of transparency in financial markets.  Put simply, that means no one, not regulators or market participants, knew what the size of certain derivatives markets (like credit default swaps) was, who held what positions, or what the consequences of holding positions could be.  If financial reform brings nothing else, it should at least hold banks accountable for the business they conduct, and that means full disclosure and constant monitoring by responsible regulators.  

This action would help provide the basis for preventing future crises. No matter how inventive financial products may become, if regulators have complete and detailed information about financial markets and banks’ activities there, better assessments of risk can be made. This means that if necessary, banks’ activities can be reigned in through higher capital requirements or similar measures.  Simply limiting banks’ ability to conduct certain business is a blunt instrument that does not resolve the lack of transparency and likely will hamper economic growth.

Market transparency exhibits itself in many forms. Particularly relevant is that related to electronic trading. Therefore, I predict that regulators will require banks to implement relevant stronger pre-trade risk mechanisms. Regulators, such as the FSA & SEC, will ultimately bring in new rules to mitigate against, for example, the risk of algorithms ‘going mad’. This is exemplified by Credit Suisse, which was fined $150,000 by the NYSE earlier this year for “failing to adequately supervise development, deployment and operation of proprietary algorithms.”

Furthermore, volumes traded via high frequency trading will increase, although at a much slower pace than last year, and at the same time the emotive debates about high frequency trading creating a two-tier system and an unfair market will die down.

In addition, with regards to mid market MiFID monitoring, greater responsibility for compliance will be extended from exchanges to the banks themselves. Banks and brokers will soon be mandated to implement more trade monitoring and surveillance technology. There will also be no leeway on Dark Pools; they just simply have to change and be mandated to show they have adequate surveillance processes and technology in place. They will also have to expose more pricing information to the market and regulators.

This year will see a definite shift to an increasingly transparent – and therefore improved – working environment within capital markets. The ongoing development of market surveillance technologies and changes in attitudes to compliance will drive this forward, creating a more open and fairer marketplace for all.

Brazil Embraces High Frequency Trading - Do You?

The trading business feels like a fight, now as ever, with the threat of sweeping regulations as the most pressing concern of the moment.  This business even sounds like a war, too - with algorithms names like "Raider" and "Sniper;" and with terms like "dark pools," and "low latency arms race" drawing focus from regulators and media alike.  But the war-like aspect remains because trading is a highly competitive business. 

The imperative to increase market share will remain a top priority this year along with risk management and regulatory compliance, and the technology required to compete is available to everyone.  As Apama has expressed before here, the markets are still driven by those with the flexibility to quickly adapt to new regulations, the insight to understand new market behaviors, and the imagination to conceive a trading strategy that can capitalize on the opportunity.  It's no wonder that the relatively small number of firms using high frequency trading strategies are responsible for over 70% of US equity trading volume.  These pressures push the rest of the capital markets in the same direction and the trend is unlikely to reverse. 

On February 8th 2010, Apama announced that Banco Fator Corretora, a Brazilian bank and brokerage firm, has deployed the Progress® Apama® Algorithmic Trading Accelerator. Apama plays a critical role in Banco Fator’s new electronic trading strategy, enabling it to more effectively develop high frequency, proprietary trading tactics, achieve rapid customization, and perform low latency execution of trades on behalf of its buy-side clients.  Banco Fator is also working with its clients to design customized algorithmic trading strategies that provide them significant competitive advantage, and the bank explicitly emphasized the importance of providing its clients with a fast method to enter the high frequency trading business.

Why so much emphasis on high frequency trading (HFT)?  Reasons will differ among traders and regions, but a short primer on HFT and some ideas are here.  The Brazilian market has expressed a strong opinion on the matter, with over 15 customers deploying Apama internally to automate execution and/or alpha-seeking strategies in the past year-and-a-half, with many further rolling out the platform to downstream clients. 

So, do you have an opinion on HFT as well?  What characteristics should a platform for HFT have to enable you to be more competitive?  Let us know - leave a comment, or take our poll.

-Dan

From Concept to Profit in No Time Flat – High Frequency Trading

Colleagues Dan Hubscher and Louie Lovas have begun a great webinar series that outlines the “lifecycle” of an algorithmic trading strategy.  Illustrated with Apama’s Event Modeler, they use a Commodity Futures trading strategy to illustrate how trading firms can accelerate the delivery of trading strategies with a development tool that is accessible to the trading desk. This can help make significant cuts in development times, allowing firms to capitalize more quickly on opportunities.  Future sessions will explore some of the other aspects of the platform that target developers, recognizing that firms have different business models and development styles.

We’ll be posting the recorded version shortly for on-demand viewing, but if you have not registered, I’d encourage you to click here and get on board for parts 2 and 3.

Buysides Finally Getting Some OTC Derivatives Love!

The ISITC OTC Derivatives Working Group, of which I am a member, recently announced its Market Practice for Contract Notification. I've been involved with OTC Derivatives trading operations and technology for almost 20 years now, the last 10 primarily on the buyside.  When I first joined an FpML working group, allocations weren't even part of the spec, and we are only now beginning to see vendors who provide buyside OTC Derivative trading solutions.

The industry itself has lagged in recognizing the buyside's role in the OTC Derivatives market.  The first movement around helping the buyside deal with the complexity of these instruments started about 5 years ago with the Swaps Best Practices Initiative jointly sponsored by ISITC and the Asset Managers Forum within the old Bond Market Association.  The BMA is now part of SIFMA and the AMF's Swaps initiative evolved into the Derivatives Operations Committee and the formation of the ISITC OTC Derivatives Working Group.

While custodians and other service providers including DTCC, Markit and SWIFT have stepped in to assist their buyside customers to process OTC Derivative trades, there are few off-the-shelf solutions. The majority of sales of Progress’s OTC Derivatives solutions for FpML, DTCC Deriv/SERV, Markit Wire and SWIFTNet FpML still go to buysides and custodians who are adding support for buyside functionality to systems designed for sellside. I am happy to report that Progress now has software vendors as customers looking to address this market. I’m optimistic as buysides spend more to meet new regulations we’ll see more complete vendor solutions.