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Why It's Important: Since the emergence of black-box trading, Wall Street has been under intense pressure to trade faster and faster. Now, with data volumes skyrocketing, firms are continually searching for low-latency solutions that can process the data streams in near real time and give them a competitive edge in electronic trading. As a result, many Wall Street firms have rapidly been adopting complex event processing (CEP) technologies that allow them to analyze unrelated data and events, detect patterns and relationships, and trade in milliseconds.
Where the Industry Is Now: The vast majority of CEP applications have until now been used for algorithmic trading. But given the current global liquidity crunch, the hike in data volumes and the increase in multi-asset and multi-geographic trading, firms recently have started using CEP in areas such as risk management, post-trade compliance, data monitoring, smart order routing and surveillance. Even regulators are tapping CEP. The U.K.'s Financial Services Authority is using Progress Apama's CEP platform to monitor transactions and detect insider trading and other market abuses as they occur.
Focus in 2008: As CEP continues to mature, firms need to take a look at how it can be holistically used across the enterprise, according to Tom Price, senior analyst at TowerGroup. "The life cycle of a transaction starts with receiving market data, and CEP can be used to create a real-time order book with depth of liquidity," he notes. "As you move further in the life cycle of the transaction, CEP can be used to analyze information, to route orders [and] to identify internal opportunities."
But beyond identifying trading opportunities, CEP increasingly will be used for risk management. "We are seeing an upswing in the interest in mitigating risk," Price says. "Everyone was dead keen on let's make it faster, lower latency, more of it. But not everyone was taking into account risk."
John Bates, founder of Progress Apama, adds, "Algorithmic trading can empower traders to be hundreds or thousands of times more productive. But potentially you're increasing your risk exposure thousands of times, too. ... Rather than just waiting for trades to happen on a tick-by-tick basis, you want to continuously calculate your positions."
Some large foreign exchange houses have started streamlining their FX operations by allowing spot exchange traders to focus on bigger deals and let smaller deals go through algorithms, Bates continues. "They will use CEP to calculate risk in real time against worst-case scenarios, so if the value at risk moves in one way, they can auto-hedge their position."
Industry Leaders: Difficult to assess. If they have a competitive edge, organizations rarely are willing to reveal how they do it. However, Commerzbank Corporates and Markets (CBCM) has annouced that it is using the Aleri Streaming Platform for automated pricing and market making, taking in market exchange rates, applying the bank's proprietary algorithms and then calculating CBCM prices in real time. London-based Barclays and Brussels-based Dexia Bank Belgium also have adopted Aleri's CEP platform for liquidity management. And Boston-based Aite Group says one sell-side institution is using a BEA platform to prevent missed arbitrage opportunities in its FX pricing engine.
Technology Providers: Major players in the CEP field include BEA Software, Aleri, Vhayu Technologies, Coral8, Streambase, Progress Apama and Truviso.
Price Tag: The CEP market is growing fast. Boston-based Aite Group estimates that revenues for CEP-related products will surpass $140 million in 2007 and reach nearly $1 billion by 2010.
