Increased reliance on electronic trading and algorithmic trading, combined with regulatory and structural changes, has accelerated the pace of overall electronic trade messaging rates in 2007, with the trend remaining intact moving into 2008.
The evolution of the modern trading-desk infrastructure is very much a function of the confluence of market factors that are driving transaction levels to extremes. The main factors include the adoption of electronic trading, the rise of algorithmic trading, the rise of alternative investment strategies, regulatory changes and increased market fragmentation. Many of these trends are most evident in equities, but are appearing to different degrees, in other emerging electronic asset classes.
More than any trend, the rapid rise of electronic trading has created an environment of greater ease in incorporating strategies that require greater and greater frequencies of trading. It is clearly evident the volume of trading increases as electronic trading becomes more accepted in an increasingly electronic market. Firms that have increased their algorithmic offerings as a response to this trend are finding that their legacy infrastructures are not up to the challenge of the stresses that these offerings place on them.
As firms began to dissect the situation looking for areas of improvement, several themes became apparent: Consolidated data managed by data aggregators was far too slow to create competitive algorithms. This led to the challenge of looking to bring direct exchange and venue feeds into a firm.
This created considerable difficulty in maintaining the data infrastructure, as each exchange and venue has unique data formats that have to be translated to properly communicate with internal systems.
Ultimately, the trend led to the rise of third-party feed handlers to properly normalize data introduced into trading firms. Today, many of the choices that some sell-side, and many on the buy-side, are looking at are service offerings that yield low-latency data in a less resource-intensive fashion.
The investment banking world is trying to handle increasing electronic trading with scalable architecture. Balancing the demands of specific trading desks and that of central IT has been challenging.
The evolution of the front-office trading infrastructure at various firms has been very much a piecemeal endeavor. While considerable architectural changes were made to many firms in the wake of September 11th, 2001, most solutions to growth in algorithmic and electronic trading since then have centered on solving the needs of specific trading groups within the firm. This approach has led to considerable stress on the infrastructure of many firms, as messaging rates have exceeded even the most aggressive estimates.
Firms that have either relied on proprietary development or the market data infrastructure provided by the consolidated data providers have found themselves in trouble over the last several years. Many firms have found the best solution is to use third-party vendor offerings to lower their total cost of ownership in light of the increasing usage of direct exchange and venue feeds.
An ongoing debate is taking place at many firms as they consider buying certain parts of their infrastructure versus building them. Furthermore, debates often rage between IT and trading-desk heads as they consider the balance between cost of desk-specific solutions and solutions that can be deployed on an enterprise-wide level.
Overall, in minimizing latency, the trading infrastructure is only as fast as the slowest bottleneck in the application and technology stack, which is a function of the network, platform, operating system and messaging middleware.
As the industry grapples with continued adoption of electronic trading and the skyrocketing messaging volume, IT spending on high-performance trading infrastructure has increased significantly over the last few years. Aite Group sees this mission critical spending continuing despite a difficult business climate and pressure to cut back technology spending, overall. Clearly, firms that optimize their trading infrastructure will be in the best position to weather the rocky road ahead.
Brad Bailey is a senior analyst at Aite Group, LLC, specializing in institutional securities and investments. He is an expert in the electronic trading of equities and derivatives and institutional capital markets technology. Mr. Bailey spent over 10 years working on Wall Street as an institutional sales trader, proprietary equity trader and analyst. He has extensive knowledge in the areas of proprietary trading, electronic trading systems, algorithmic trading, system modeling, testing, hedge funds, OTC derivatives and exchange traded futures and options products.