Excerpts from The Tabb Group report: Pushing the Envelope: Redefining Real-time Transaction Processing in Financial Markets
With commentary from Tim Shetler, VP Marketing, TimesTen, Inc.
Why is real-time transaction processing important in today's financial markets? What's driving it, and where does it matter most? Such questions are covered in a recent report from Larry Tabb of The Tabb Group entitled Pushing the Envelope: Redefining Real-time Transaction Processing in Financial Markets.
With securities trading, information delivery speed is one of the most crucial elements to an institution's offering. Markets will move toward real-time processing until there is no longer enough competitive advantage in going further. As the Tabb Group report notes, "electronic trading, algorithmic models, and black box execution will continue to split trades into smaller lots, increase the quotes per trade ratio and continue to challenge the industry's capacity." To comprehend the potential outcome of this predication, consider that the number of U.S. equity trade orders executed per second has doubled over the past two years, and the rate of increase has not slowed. For an exchange or sell-side broker dealer, these statistics should not go unnoticed.
Here are a few key excerpts from Larry's report that elaborate on these points:
"The speed of financial information is outpacing anyone's forecast. Financial engineering, FIX connectivity, algorithmic trading, and black box models are dramatically changing the way that sophisticated traders and market participants are addressing the markets as lower costs and higher compute and networking speeds are enabling the creation of automated model-based trading. These models are analyzing the market on a microsecond basis, trying to gauge liquidity and seek opportunity. As the models become more accepted, their use increases the velocity of the market and forces other participants to leverage them, as the pace of trading becomes too fast to manage by hand.
Increasing transaction and data speeds are having a major impact on the industry. The increases are forcing firms to significantly invest in their trading and processing infrastructure. As speeds increase, market data infrastructures will be the first to sag. Current market data architectures were not built to manage this overwhelming volume. Concurrent with data architecture investment will be investments in processing systems relying on or tangential to the trading process, such as order management and order routing technology.
On top of a more robust trading infrastructure, we will see investments in risk management and product integration as firms look to extend their trading and processing infrastructure to their clients. New risk management investments will be needed to ensure that hedge funds and institutional investors are properly monitored as they leverage these new capabilities. Additionally, as more products become electronically tradable and the risk analytics become faster and easier to understand, firms will be able to create synthetic securities based upon their trading, market risk, and cash flow characteristics. This will tie together traditionally disparate products, facilitate cross product hedging, and accelerate the need for consolidated risk management and an integrated view of the customer, the trading desk, and the organization.
To support these applications and the drive for enhanced real-time transaction processing, we will need investments in underlying infrastructure such as faster servers, enhanced networking technology, better and more robust storage, and a more focused set of data management tools.
While the limit for real-time transaction processing seems limitless, the challenge will be applying these technologies in a more cost conscious environment, swapping decentralized for centralized, high cost for low cost, batch for real time, and big iron for small. As these changes occur, the one thing that seems clear as the need for enhanced real-time processing is the need to maintain a low cost infrastructure. Although real-time processing enables firms to capture opportunities, it also lowers margins, cost structures and competitive barriers. This all but guarantees a price war and accelerated competition, and drives further what has become the insatiable need for speed but at increasingly competitive prices."
So where does this quest for speed end? Clearly, automated trading will be a permanent feature of trading desks around the globe, and human intervention in trading will have a diminished role over time. Without automation, risk management wouldn't be feasible, but with faster automation, we'll see more real-time risk management as the enabling technologies make pre-trade assessment viable. Whether or not speed is a differentiator in the back office remains to be seen. Ultimately, more tasks will be automated and speed of automation will become a distinction, until fast becomes the norm, and faster becomes the benchmark. So, there is no real end as long as a time advantage equates to value that exceeds the cost to gain that advantage. All things considered, the future looks pretty good for the speed demons. Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio