TradeTech Architecture - ‘Everyone needs to reach the finishing line at the same time’

10 October 2011

Landmines and automated mice are not necessarily the first things to spring to mind when contemplating the landscape of global trading - but they were part of the picture painted during the opening address at the TradeTech Architecture event held on 5 and 6 October in London.

Chris Skinner, chairman of the Financial Services Club (FSC) and chair of the conference, described issues surrounding trading, including credit default swaps (CDS), over-the-counter (OTC) derivatives and low latency, as potential landmines for the markets. He said that “good sniffing” by “automated mice” is required if these potential risks are to be discovered and prevented from destabilising the financial services industry.

Metaphors aside, panels at TradeTech Architecture attempted to define, then suggest solutions for the problems facing participants in e-trading architectures. The terminology and initial discussion highlighted how high frequency trading (HFT), low latency and cloud computing can have different definitions depending on the participant and context - which makes the industry and regulators’ task of resolving concerns in these areas even more difficult.

The debate certainly did its best to tackle key concerns for traders head on. Innovation in the trading space was dissected with debate focusing on whether new technology surrounding latency and automated processing represented a dream or a nightmare.

In the discussion surrounding ‘Cross-Asset HFT Strategies’, Yann L’Hullier, group chief information officer (CIO) at Compagnie Financiere Tradition, leaned towards the latter, saying that the increase in the pace of trading brought on by participants racing to be fastest has exacerbated market fragmentation.

He said: “Traders and trading platforms are ahead of the game with some now completing trades in a matter of nanoseconds. But risk managers and regulators are far behind. There needs to be a slowdown in the evolution of the pace of trading to enable the rest of the market to catch up. Everyone needs to reach the finishing line at the same time.”

The 2011 Automated Trader Algorithmic Trading Survey, which was published on 5 October, highlighted how market professionals view latency as providing them with a competitive edge. Almost three-quarters of respondents in the research said they saw latency as “crucially important to the success of their principle trading strategy”, with 13.8 per cent stating that they need to achieve the lowest latency possible for their trading strategy to be effective.

In addition, almost 58 per cent said that while they do not feel the need to be the fastest, being slower than their competitors does have a negative effect on profits surrounding trading strategies.

However, despite these findings, the second panel suggested that speed could only allow a trader to go so far. Iran Hutchinson, product manager at Intersystems, said: “Where do you get your advantage after optimising every process? It is the combination of best strategy and most effective technology which affords the fastest trader an advantage - but then the market catches up and the playing field is level again.”

Scott Caudell, vice-president of information technology infrastructure at Interactive Data, likened the latency race to a group of children chasing a ball in a playground - with all participants following the target en masse before a new discovery is made and the goalposts shifted.

Debate surrounding this area spilled into the second day, which emphasised how hot a topic it currently is for the industry. In the ‘Determining How Fast You need To Be: Designing Low Latency Platforms that Meet Your Trading Requirements’ panel, Paul Rolfe, senior business development manager for UK and Europe at Thinksoft Global Services, said that innovation is not the most crucial factor for businesses.

He said: “If the business requirement is not there for new technology, then there is no point pushing it. ‘Bells and whistles’ do not matter. The most important thing for a business is for it to achieve what it set out to achieve.”

Jogi Narain, chief technology officer (CTO) at FGS Capital, drilled down further into this point. “Latency is about understanding where your business is at and what it does. It’s not just about speed. Only a small part of the market competes for the fastest latency.

“However, if you are operating in this area, then you need the same sort of weapons as everyone else to remain competitive,” he explained.

Elsewhere, the ‘hot potato’ of regulation was again tossed between various panel members of the regulatory think tank, including Diego Valiante, one of the top 40 Under-40 Rising Stars of Trading and Technology, as chosen by Financial News.

The emergence of HFT has caused regulators headaches with much speculation surrounding whether this can cause instability in the markets. However, Anthony Belchambers, chief executive officer (CEO) of the Futures & Options Association (FOA), was perhaps the most critical of regulators, suggesting that they were smothering growth by leaning too much towards making the markets safe.

He said that industry bodies had been too cautious, and warned that without risk, there is no economic growth as there is no investment. “Adopting a safety first approach does not come cheap. There is eventually going to be a real cost if this carries on. Safety should not have to be at the expense of choice or innovation.”

By Jim Ottewill

If you’re interested in attending Trading Architecture Europe which takes place in London on 7-9 February 2012. For an exclusive 15% discount for Bobs Guide readers only use this code when booking online: BOB321

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