Automated Trading's Brave New World: Speed Flexibility and Competitive Advantage Through Open Source

Automated Trading's Brave New World Speed, Flexibility and Competitive Advantage Through Open Source Presented by Kevin McPartland TABB Group

Agenda

Introduction

The Market

The Latest and Greatest

Execution Management Systems

Order Management Systems

Looking Ahead

The Market

Electronic trading has drastically changed the US market Source: TABB Group and Exchange Data US Equity Share volume and trades Dec 07 Avg. Trade Size 247 Shares / Trade Jan 97 Avg. Trade Size 1,477 Shares / Trade Decimalization

Shares by Execution Venue (volume weighted) ’ 06-’09 CAGR Trade flow is continuing to move from sales traders to low touch channels

Volatility reaches wild highs… and stays there H 89.53 Source: Yahoo! Finance, TABB Group

All of which will continue driving up data volumes OPRA Capacity Recommendations Messages Per Second (MPS) 4yr CAGR 98% 6yr CAGR 81%

Data is not only abundant, but must also be fast 21% CAGR Spending on Low Latency Messaging Infrastructure $USD Millions Source: TABB Group Estimate Percentage of Firms Using Low Latency Data

The Latest and Greatest

Trading systems are necessary in today’s market environment 98%

When finding liquidity hedge funds value their EMSs and OMSs above all other technologies

Which are the products or tools that are most useful to you?

58 responses Why are you planning to change your EMS? Are you planning to change your EMS? Nearly half of buy side participants plan to change their EMS in 2009

58 responses Why are you planning to change your OMS? Are you planning to change your OMS? Fewer are thinking about an OMS change, yet consolidation is still a key driver

26 responses What are the key factors in selecting an EMS? Customization and Integration are critical

Only the best will do

More now than ever, buy side traders know what’s out there and what they want

Despite the complexities involved, buy side traders are still willing to make a change to their current OMS or EMS

The ability to customize, integrate with existing technology and consolidated needed functionality is critical

So what’s the problem?

2 Yr CAGR 4% 2 Yr CAGR -12% The global trading system market has contracted

Due in large part to a decrease in overall IT spend by hedge funds Estimated Hedge Fund IT Spending ($USD Millions / year) Scenario 3: Steep declines in the number of funds and IT spend among survivors Scenario 2: Across the board decline in hedge funds, and modest declines in IT spending Scenario 1: Current industry figures with modest declines in IT spending Pre-Crisis Spending Estimates

98% How much do you pay for your OMS? The cost of broker-independent technology remains high

2 Yr CAGR 43% 5 Yr CAGR -15% Average Number of EMSs Used Buy side traders are consolidating trading activities onto fewer platforms

Everyone must do more with less

Hedge funds and asset managers will rationalize their application portfolios over the next year

The buy side will look to access all broker provided trading tools through a single interface

Counterparty risk concerns from the global financial crisis will leave some looking for alternatives to broker provided solutions

Doing more with less continues to be the trend

Growing while contracting

Hedge Fund Usage of Broker Independent EMSs Proprietary trading platforms are still common Asset Manager Usage of OMSs

… but IT budget cuts and new off the shelf technology are causing a change

Internally developed systems are tailored to meet the needs of the firm, but starting from scratch and ongoing support is too expensive and time consuming for many hedge funds in today’s environment

Off the shelf trading technology can prove too sophisticated and too expensive for smaller funds

What other options are there?

The best of both worlds – Buy vs. Build

Buy

A working (and proven) system right out of the box

Ongoing support for the product

Build

Complete control over the code base

A system unique to your competitors

Customizations at will

Open Source

All of the above

Open source growing in financial services

The use of Linux is widespread from major exchanges to top tier investment banks

Products such as MySQL and Apache sit underneath many mission critical applications

A number of banks along with an enterprise messaging provider all support the development of the AMQP messaging standard

OrecX is used to record spoken trade details

Financial specific Open Source projects continue to grow in sophistication and usage such as Quick FIX and QuantLib

In steps the open source trading system

The idea of an open source OMS may prove a good alternative for those contemplating whether an internally developed system makes sense.

Open source platforms are created by a community of developers and distributed for free. Providers make money from these platforms by charging fees for maintenance and support.

A few years ago this idea seemed crazy for financial services, but in today’s cost conscious environment an open source OMS can provide just the right blend of buy vs. build for some buy side firms.

What the future holds

Current Satisfaction with EMS Elements Despite generally high markets, more innovation is needed

Summary

In an effort to cut IT spend and create a more efficient trading process, the buy side is increasingly looking to rationalize their use of trading technology.