Bank trading - Is there still a need for speed?

Bank trading has been increasingly dominated by speed over the past few years. As technology has advanced, brokers have clamoured forever lower latencies to achieve faster order processing times, increase their competitiveness and win more business. The demand has seen a number of technology solutions promising quicker execution times released to the fintech market. But …

July 1, 2011 | bobsguide

Bank trading has been increasingly dominated by speed over the past few years. As technology has advanced, brokers have clamoured forever lower latencies to achieve faster order processing times, increase their competitiveness and win more business.

The demand has seen a number of technology solutions promising quicker execution times released to the fintech market. But is this desire to go faster still having as much of an impact on trading strategies as it once did?

Figures quoted by the TABB group in April 2011, and reported by the Financial Times, suggest that the industry view of speed is changing. Larry Tabb, head of the consultancy group, estimated the practice to account for 54 percent of all US equity trades, rather than the 61 percent quoted in a forecast from 2009, which shows that the prevalence of high frequency trading is dropping.

A study from the group, which was published on 9 June 2011, found that the market place for ultra-high speed trading solutions in the US has reached saturation point. The ‘Quantitative Research: The World after High-Speed Saturation’ paper claimed that speed no longer provides “the dramatic competitive advantage of the recent past”. Instead traders are looking at data management and single storage solutions to help improve workflow efficiencies, the Tabb Group explained.

A number of technology solutions aimed at increasing trade speeds were unveiled at the SIFMA conference, held in New York between 14 -16 June 2011.

• Fixnetix showcased iX-eCute, an FPGA (Field Programmable Gate Array) microchip, which is capable of achieving latencies as low as 740 nanoseconds through the stack (wire-to-wire).
• Endace announced a partnership with Verizon to offer a technology solution designed to solve data gap issues that can adversely affect the quality of market data.
• SIX-Telekurs announced it would be collaborating with CFN to offer ultra-low-latency, direct-exchange-access market data on the Alpha Platform.
• In the previous week Cinnober launched TRADExpress Ultra. This new product offers average door-to-door latency under 10 microseconds.

So what does this mean? Is pace still as important for traders as it once was? With this many products claiming to offer trades faster than the blink of an eye, it’s obvious that vendors believe speed is still a main competitive driver. However, it now has to be considered alongside a number of other issues when a trading strategy is being created.

Bob Fuller, director at Fixnetix and chairman of the Markets in Financial Instruments Directive (MiFID) IT Sub Group, said that this is because of the changes in the trading landscape of today and five years ago.

“Back then shaving an extra-milli-second off the execution of an order could make a vendor an extra million a day – but now that’s no longer normally the case.”

Per-Anders Häll-Bedman, deputy chief executive officer at Cinnober, said that pace is important, but trade executions cannot be “faster than the speed of light”.

“At some point you could lower the level of execution logic from 1.2 microseconds to 1.1. Percentage-wise it is a fantastic improvement but in the total order chain, the advantage is negligible.”

He cited consistency in response times as a key factor for traders to examine when looking at their order execution times. “Reliability is equally important as low-latency,” he explained.

Pace may no longer be the be-all and end-all when it comes to trades – but Fuller said that it is still an issue for traders to keep in mind when working on their strategy.

“Speed is certainly still very important. If you want to execute against what you see, you have to be at least as fast as the rest of the marketplace. If you spot a wonderful opportunity and you’re not fast enough, someone else will get it. But it is no longer the licence to print money that it was a couple of years ago. You need to be fast but clever with it.”

Paul Rowady jr, author of the TABB Group’s ‘Quantitative Research’, said his report emphasised the importance of a balanced approach to a trading strategy.

He said: “Speed is not dead. It’s just getting harder to capture alpha purely based on this one area, which means the majority of those committed to automated trading and other quantitative methods will have to look elsewhere for new sources of alpha.

“This will introduce a host of new challenges focusing on data management, technical infrastructure and personnel to engage in more complex pattern recognition and research,” he added.

By Jim Ottewill

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