2013's Trading Technology: A Year of 'Accelerating Returns'

Rate of change, Moore's law, tech-human singularity. All three refer to the quickening pace of technical innovation, but the third one, often attributed to Ray Kurzweil's Law of Accelerating Returns, is the most expansive—in predicting that by 2045, people and their technology will be practically indistinguishable. Kurzweil proposed his theory in 2001, the same year Apple introduced the world to the iPod.

Many business-related technologies at financial firms—while crucial and evolving—are mostly static in their behavior. They're meant to be secure, stable, and scalable—any excitement beyond that means a disaster is in the making. Trading technologies, on the other hand, are relational to their users almost by definition. In 2013, these platforms and tools became more interactive, more capable of advanced simulation, more functionally integrated, and better designed to handle esoteric asset classes. Some of those priorities moved faster than others. Some of them took root in new geographies. And some—like electronic swaps trading—continue to confound.

The following takes a look back at Waters' coverage of these ideas and struggles—highlighting some of the best arguments we heard, an unbelievable fact here and there, and an assessment of why some of them have accelerated more than others as we head into 2014.

OEMS Comes of Age

Platforms and product concepts marrying multiple functions have had a banner year in 2013. On the business side, that was exemplified by the Investment Book of Record (IBOR).

For trading, a more established but often technically-impossible notion—fusing together order and execution management functions into a single 'OEMS'—seemed to come into its own. Citadel and Goldman-spinoff REDI Technologies announced a partnership to build one. Another new entrant, Liquid Holdings, which brings together kits from several shops including Soros Fund Management, gained traction in the second half of the year. And almost every other mainstay OMS and EMS provider is looking to fashion a little bit of the other side into their offering.

"The EMS–OMS standoff has torn apart families, claimed thousands of lives, melted the glaciers and destroyed all the major cities of Denmark. OK, maybe it hasn’t done any of those things, but it has forced certain smaller shops to make difficult choices—choices that may finally be resolved by the progress of technology, though not because of the victory of either side," Jake Thomases wrote back in May.

UX/UI Research Gains Strength

User experience and interface—once afterthoughts for trading platforms—now define them. That is almost certainly owed to traders' expectations being raised by their more constant, indeed tactile, relationship with smartphones, iPads, and similar consumer devices. In 2013, major financial information providers beefed up their research capabilities in the area accordingly, hiring everyone from design specialists to psychologists to deck out their user experience labs.

Bloomberg's New York-based usability lab (right) grew out of the information giant's NEXT redesign, at the cost of several million dollars. Among other things, it uses a series of cameras and lasers to track test subjects' hand and corneal movements. Every little detail can thus be simulated and vetted.

"It's about visual design having an effect at the software's infrastructural level," Fahd Arshad, Bloomberg's head of UX design, said.

Algos' New Future(s)

Just as UX simulation grew in importance, so too did simulation for algorithmic trading, whether from a market risk viewpoint, or for generating desired slippage by modifying a given execution strategy. This latter application has particularly grown in importance for futures trading, where icebergs and other exotic order flow is beginning to receive support from exchange venues, allowing managed futures specialists and other buy sides to design complex, multi-leg models to take advantage of opportunities, and also avoid being sniffed out and bidded-up by high-frequency snipers.

The trend meshes nicely with the broader notion that near-zero latency—at least on its own—won't cut it any longer. Consistent speed, and smart algos, may well win the race today.

“Certainly, there are people in our market who don’t want it to look like equities, which some would argue have become a disaster. But take the good parts, and leave the bad," explained Jeff Burnett of $4 billion Quantitative Investment Management.

Getting Credit Right

Four features this year focused on better automating—or in the case of corporate bonds, overhauling—different kinds of credit products. In addition to corporates, the need for more efficient settlement mechanisms in the collateralized loan obligation (CLO) market was scrutinized, as was greater data standardization for an increasingly popular alternative for institutional investors: private equity (PE).

None of the three is quite there yet—in part because the IT puzzle pieces have yet to be put together—but each has come a long way, and the priorities certainly cleared up in 2013: A better reflection of where the liquidity lies, i.e. with major buy sides, for bonds. Faster turnaround for CLOs. Sector-level data for PE fund performance, delivered more frequently. Alternative models were subtly voiced, too—whether a crossing network for corporates that would cut dealers out entirely, or co- and direct investment strategies leveraged by limited partners (LPs) that would potentially squeeze out sell-side general partners (GPs).

“People will tell you that something’s live but it’s not engageable, or when you engage it, the person making the price has an option to back away. I can tell you that quite often they take that option. Without a firm executable price, innovation is just not possible," said Chris White, vice president of eCredit at Goldman Sachs, on corporate bonds.

A Lengthy Delay: Amazingly, some bespoke CLOs still take as long as 70 days to settle.

Emerging Markets: Build IT, and They (Might) Come

Waters featured nearly every habitable continent in its pages this year. Whether African exchange consortia, Mexico's new low-latency connectivity and infrastructure, a regional Central European hub growing out of Warsaw, or bridging regulatory fragmentation in Asia and Australia, the financial IT world grew flatter in 2013. These projects reflect investors' desire to diversify their exposure away from the traditional Anglo-American financial centers and developed economies, and probably portend a future leaning towards more influential regional networks of liquidity.

Still, a running theme is that for each gambit to work, their stars (and politics, and macroeconomic conditions) must stay aligned. While the industry has learned much from earlier attempts to set up shop in new corners of the world, a certain factor of luck—and reliance upon local IT expertise—remains. Therefore, while some trail was definitely blazed this year, one would just as likely expect for some of these ambitions to work out successfully ... and others not to.

Far-Flung Implementation Awards: Nasdaq's engagement with the Kurdish Stock Exchange in Erbil. NRI, partnering with Omnesys and local startup GII to upgrade trading infrastructure in Mongolia's capital, Ulan Bator.

Then there is Novosibirsk-based tech provider Arqa Technologies, a Russian tech company which implemented S&P Capital IQ's consolidated market data feed. Novosibirsk, as its name would suggest, is about 2000 miles east of Moscow.

Swaps Mania

By far, our greatest preoccupation in 2013 was with the newly-mandated central clearing and electronic execution of swaps via swap execution facilities (SEFs) in the US. As David Downey, CEO of OneChicago, was fond of saying in 2012, "I don't know what a SEF is." This year has seen enough rulemaking—or, at times, guidance clumsily posing as rulemaking—to answer that particular question.

A thousand others continue to swirl, though:

How will capital charges affect major dealers' ability to leverage their balance sheets on behalf of clients? How can they enable their futures commission merchant (FCM) arms to cross-margin futures with swaps and legally segregate but operationally comingle pools of client margin? What about making efficient use of buy sides' collateral, whether by optimizing it, transforming it, or allowing it to be rehypothecated? Or providing agency access to multiple SEFs on a single screen?

All is not entirely lost. Middleware providers have successfully built out pre-trade hubs for credit checks (whether or not Markit's or Traiana's hub might fall away remains to be seen). Major clearinghouses like LCH.Clearnet are looking at portability algorithms in the case of an FCM default. Two different types of portfolio compression tools—one to run mandated risk-free netting; the other, borrowed from the old dealer-to-dealer model, called risk-constrained compression cycles—have emerged.

Technology, in other words, has done its duty. Yet the early SEF numbers would also indicate that, so far, it has done precious little to genuinely disrupt markets that were always going to default to Icap and other interdealer brokers (IDBs) for rate swaps, and to Bloomberg for CDS.

Therefore, as the buy side comes under mandate in 2014, the extent of tech's influence in the transformed market remains an open question—one quite a few SEF folks have bet the house on. As for the sell side, BNY Mellon's Nadine Chakar put winning criteria in very simple terms at Waters USA.

"Scale and capital," she said.