Coping With the Electronic Market Revolution: Susquehanna Partners Reinvents I.T.self
Since hanging out a shingle in 1987, Susquehanna Partners (SP) has built up a successful proprietary global securities trading business. Noted for their expertise in the trading and risk management of derivative securities products, SP officials have come to realize how important it is to stay ahead of the IT curve. A few years ago, though, SP officials saw that in order to stay out in front, a massive IT overhaul was in order.
"Within the last five years there’s been sort of a radical change in the business in that technology has enabled new market structures to exist, new ways to trade products," says Eric Noll, a head of Strategic Planning at SP. "Wanting to maintain our market leadership role we realized we had to move forward, and that’s when we started this enormous technological rollout."
In the second year of a three-year-plan laid out in late 1997, SP officials continue to rip out and rewire everything from their ticker plant to the database platform–and spending upwards of $150 million to do it. Surprisingly, though, this segment of the market was not always as IT intensive as it has become.
"We’ve been a market leader in not only equity options and index options, but also in trading equities, FX, FX derivatives, fixed income and fixed income derivatives for years under a slowly evolving environment that wasn’t really technologically focused, but more focused on market structure," explains Noll.
So, SP officials huddled for several months, developing a strategy for the overhaul. "In the third and fourth quarter of 1997, we spent a lot of time just thinking about this market evolution, and how we needed to respond to it," says Hylton Socher, SP’s CIO. "At the time, Susquehanna had some very strong core systems, known for our prowess in program trading and ability to execute large baskets electronically, but a lot of those systems were not connected information-wise."
SP needed an integrated IT platform. To get a better idea of the enormity of SP’s project, it’s important to know all of the components involved.
These included the implementation of high-speed, redundant multimedia network technologies (Asynchronous Transfer Mode). Reuters’ Triarch was selected as the new ticker plant to supply real-time data across a massive set of underlying and derivative securities worldwide.
"Prior to bringing in Reuters’ Triarch, we had a proprietary ticker plant," says Socher. "We realized to cope with the throughput and scope of the market data we needed in the new market environment, we would have to go to a vendor."
TIBCO’s Rendezvous was installed as a middleware messaging layer to connect traders worldwide. "We needed a middleware component, which was perhaps the most important piece in a lot of ways, because it highlighted the integration of all these components, as well as distribution of information across all of our trading floors," explains Socher.
Susquehanna also developed a new object-oriented order-routing and order-execution system (MIDAS). "We are essentially looking at an electronic market that was becoming more and more fragmented," says Socher. "Just look at the multiple ECNs in the OTC market and the electronic options exchanges in Europe, and then the potential for those exchanges domestically. We knew that intelligent order routing, being able to direct trades electronically, was a core component."
The system relies on a number of technologies, including Triarch, Rendezvous, and a Secant object-oriented database. The entire system was developed using object-oriented design.
Using a combination of analytical back-testing techniques, Susquehanna has developed an automated order generation system for equity markets. Testing trading strategies against historical tick-data from major exchanges, the system formulates optimized trading strategies. These strategies are then run in the live market environment comparing returns on various sets of securities, and are then used to automatically generate orders, executions and hedge strategies. Susquehanna is also in the process of developing an automated derivatives trading system.
Oracle running on highly scalable clustered Sun Servers was selected as the new database platform. Meanwhile, over 700 Microsoft NT 4.x workstations were rolled out to SP traders worldwide, as well as upgraded voice capabilities across all of the trading floors. Also part of the project was a massive upgrade of all Unix file server capabilities which include the implementation of large distributed Network Appliance file servers to support between 175 and 200 Sun Solaris servers.
A leader in domestic equity derivatives market making, Susquehanna has also built an Autoquote system tied in directly to the systems and screens on the CBOE, AMEX, and PHLX options trading floors. Though an Autoquote facility is provided at most exchanges, Susquehanna’s proprietary technology gives the firm an edge, both analytically and ergonomically. Susquehanna’s own analytical models are used for derivative pricing and risk management. Also, the system has been developed using touch screen interfaces enabling traders to quickly adjust their markets in a broad number of option series. According to a status report of the project: "In most cases, the exchanges have asked our specialists to limit the frequency of order updates so that the exchanges’ quote systems would not be overwhelmed."
Also part of the project was the rollout of a real-time risk management system that combines information on SP’s trading activities across multiple trading floors. Trades are input in real-time on the floors of all the exchanges. These trades are combined with information from the ticker-plant and internal order-routing systems to aggregate the firm’s cumulative real-time positions.
These positions are then analyzed and presented to the risk group in a variety of risk-management report formats. Multiple standard-deviation moves in market parameters are evaluated against the position portfolio and analytical risk measures and Dollars-at-Risk numbers are calculated at various levels–individual trader, product, industry, desk, country, etc. In addition to these real-time risk management systems, Susquehanna has also built innovative currency risk calculation systems that monitor cross-currency risks in structured foreign exchange products.
Susquehanna is also putting the finishing touches on new trader communications technology. According to the status report: "Susquehanna’s ability to electronically connect all of its traders across trading venues internationally is enhanced by an electronic chat system which each trader runs on his/her wireless handheld or desktop computer. This system allows traders to communicate person-to-person, facilitating the execution of arbitrage opportunities, or across wide groups or topics providing more general ‘market color’ and order-flow information."
Meanwhile, in the financial services industry, nobody lives in a vacuum. "We have a strategic alliance with Bank of New York whereby we provide derivatives traders quantitative structures and technology primarily for pricing and risk management," says Eric Brooks, SP managing director and partner. "We have that alliance with them in fixed-income derivatives and FX derivatives."
Though they have completed the bulk of the rollout, SP officials are still some distance from the finish line. "One of the key milestones of next year is going to be the delivery of a process whereby we internalize our order flow on the equity side in Europe," says Brooks. "We’re in the process of opening an office in Dublin, and by next year we expect to have expanded our internalization, or crossing network if you will, in Europe to accommodate our European equity order flow in addition to our domestic."
"The choices that we’ve made have been fairly mainstream and solid," reflects Socher. "We’re very happy with the vendors we’ve chosen. Though, I don’t think we’ve taken any specific risks like some firms have in the past opting to go with the next platform. We pride ourselves on our ability to look ahead in time a little bit and try to perceive the changes that are coming in the marketplace."
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