10 Imperatives of Algo Trading

Tuesday, April 27, 2010

Monitoring and surveillance: the route to market transparency

Posted by Giles Nelson

Again this week, capital markets is under the spotlight, with the SEC and Goldman standoff. Just a few weeks ago, the FSA and UK Serious Organised Crime Agency were making multiple arrests for insider trading. Earlier this year Credit Suisse were fined by the New York Stock Exchange for one of their algorithmic trading strategies damaging the market. Still, electronic trading topics such as dark pools, high frequency trading are being widely debated. The whole capital markets industry is under scrutiny like never before.

Technology can't solve all these problems, but one thing it can do is to help give much more market transparency. We're of the view that to restore confidence in capital markets, organisations involved in trading need to have a much more accurate, real-time view on what's going on. In this way, issues can be prevented or at least identified much more quickly.  I talked about this recently to the Financial Times, here

Last week at the Tradetech conference in London, Progress announced its release of a second generation Market Monitoring and Surveillance Solution Accelerator. This is aimed at trading organisations who want to monitor trading behaviour, whether to ensure compliance with risk limits for example, or to spot abusive patterns of trading behaviour. Brokers, exchanges and regulators are particularly relevant, but buy-side organisations can also benefit from it. Previously this solution accelerator just used Apama. Now it's been extended to use our Responsive Business Process (RPM) suite, which includes not only Apama, but Savvion Business Process Management, which extends the accelerator to give it powerful alert and case management capabilities. We know that monitoring and surveillance in capital markets is important now, and believe it will become more so, which is exactly why we've invested in building out product. You can read the take on this from the financial services analyst Adam Honore here and more from Progress about the accelerator and RPM. A video on the surveillance accelerator is here

As all this is so relevant at the moment and Tradetech is the largest trading event of its kind in Europe (although very equity focused), we thought we'd conduct some research with the participants. We got exactly 100 responses on one day (which made calculating the percentages rather a breeze) to a survey which asked about attitudes to European regulation, high frequency and algorithmic trading and dark pools. Some of the responses relating to market monitoring and surveillance are worth stating here. 75% of respondents agreed to the premise that creating more transparency with real-time trading monitoring systems was preferable to the introduction of new rules and regulations. 65% of respondents believe that European regulators should be sharing equity trading information in real-time. And more than half believe that their own organisation would support regulators having open, real-time access to information about the firm's trading activity. To me, that's a pretty strong sign that the industry wants to open up, rather than be subjected to draconian new rules.

There will be substantial changes to the European equity trading landscape in the coming year. There will be post MiFID regulation change by the European Commission acting on recommendations by the Committee of European Securities Regulators who are taking industry evidence at the moment. Their mantra, as chanted last week, is "transparency, transparency, transparency". Let's hope that this transparency argument is expressed in opening up markets to more monitoring rather than taking a, perhaps politically expedient, route of outlawing certain practices and restricting others.

Monday, March 23, 2009

We're going on Twitter

Posted by Giles Nelson

Louis Lovas and myself, Giles Nelson, have started using Twitter to comment and respond to exciting things happening in the world of CEP (and perhaps beyond occasionally!).

The intent is to complement this blog. We'll be using Twitter to, perhaps, more impulsively report our thinking. We see Twitter as another good way to communicate thoughts and ideas.

We would be delighted if you chose to follow our "twitterings" (to use the lingo), and we'll be happy to follow you too.

Click here to follow Louis and here to follow Giles (you'll need to signup for a Twitter account).

Friday, March 21, 2008

CEP and Real-Time Risk – “The Dog Whisperer”

Posted by Chris Martins

This week’s Financial Times published an interesting article by Ross Tieman on technology’s role as a “scapegoat” (his term) for some of the problems in financial markets. With its both evocative and provocative title, “Algo Trading: the dog that bit its master”, you can get a sense of the article theme, though a complete reading of the piece is worthwhile.

One of the challenges noted by the author is in the area of risk management. Too often existing risk processes - and their supporting technology - focus upon performing end-of-day assessments. But when much of the trading activity is quantitative, that can be much too late to detect when positions are careening out of control and risk thresholds have been breached. There seems to be growing recognition for the need for continuous calibration of positions – what amounts to real-time risk management – in order to keep pace. Perhaps the notion of a “daily VAR” may well become an artifact of the 1990’s. 

Just as it powers a number of real-time trading deployments, CEP can be an equally rich technology foundation for building the kind of real-time visibility that is needed by modern risk management systems. The same technology that drives quantitative trading can equally be applied to the task of monitoring that trading and keeping it in check, if necessary.

Now risk management is an extremely complex endeavor, so I would not argue that CEP alone is the answer. But rightly implemented, CEP clearly offers the low latency infrastructure that can help drive the real-time calculations that are needed. Market regulators (e.g. FSA) and trading exchanges (e.g. Turquoise) have begun to recognize the potential of CEP to monitor market behavior. It is likely only a matter of time before trading firms awaken to the possibilities of CEP driving real-time risk systems that monitor behavior within the firms themselves.

So, if you’re concerned about the technology “dog” biting its master, perhaps it’s time to consider CEP as a prospective “dog whisperer” that can help manage the risk.