LOS GATOS, CA & NEW YORK, NY, May 17, 2005 â A new industry report, "Data: The Life Blood of the New Electronic Marketplace," by TABB Group, the financial marketsâ data-driven research and advisory firm, shines a searchlight at the challenges the financial markets face concerning the massive and rising amounts of data at their fingertips and whether current technology is able to support the exploding volumes and data flow. Written by Robert Iati, partner at TABB Group, the report is currently available through Vhayu Technologies, the industry leader in streaming financial market data analytics.
TABB Group estimates that black box trading strategies comprise less than 10% of current order flow, but as it is projected to approach 60% to 70% in the next few years, the related tick data count could increase as much as ten times.
Iati points out that, with these increases in data flowing through the financial marketsâ data systems, the systems have become "stressed," especially with regard to reference data. "As each marketplace steadily integrates electronic trading platforms into its core, trading strategies are advancing across asset classes in search of ways to exploit opportunities outside their traditional markets," writes Iati. "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."
In a business that has become so dependent on programs, algorithms and other black box mechanisms to achieve best execution, explains Iati, "the pressure to gain the slightest edge in the marketplace has driven firms to adopt a laser-like focus on data."
Key points discussed in detail include:
Â· Algorithms: A trader may use one custom algorithm and, due to market dynamics, adjust it on the fly. The model needs to be changed, tested using historical data, implemented, and executed using real-time data - all within minutes, placing tremendous stress on the reference data, as the speed with which this must all come together demands an optimal infrastructure.
Â· Trade analytics: The transactional cost analysis (TCA) process has grown in complexity and includes both pre- and post-trade examination concentrating on incorporating historical data, tick-level trading activity and competing statistical methodologies. Each is based on the same database of historical and real-time market information, adding to the stress placed on data infrastructures of all buy-side and sell-side firms.
Â· Trade execution: A program that has the capability to act milliseconds faster than the others provides not just a marginal, but an overwhelming advantage to the trader.
Â· Data volumes: Growth is so rapid that the Options Price Reporting Authority (OPRA) recommends required capacity should grow to 130,000 messages per second by January 2006.
Â· Compliance: The specter of the SECâs Reg NMS rule changes looms large for real-time data needs. While its final form is still not assured, we can be quite certain that changes to the trade-through rule will amplify the need for best execution and create a more volatile market.
Â· Market data: TABB Group estimates that the global securities industry spends nearly $4 billion on real-time market data. However, firms have had to do more with less as reference data often falls victim to the "cost center syndrome," discouraging the application of discretionary funds directly to cost centers in favor of their use within the profit center or trading area of the business. Today, budgets for data infrastructure have been reduced when the need to enhance performance is great.
Â· Reference data: "Black boxes" that provide the technology for advanced electronic trading are the heart and soul of the traderâs business, but reference data acts as its blood.