The Flash Crash may very well be talked about more these days than the credit crisis. Not only is it an area of interest for regulators and traders but technologists as well. IET takes a look at the issue from a technology perspective in this article.
‘It seems to be more of a market structure issue,’ says Tabb Group’s Kevin McPartland. He points out that the collapse was fast, but the recovery from the situation where valuable shares were offered for a penny each came equally quickly.
‘Did it happen quickly because of the technology? Of course. But the rebound was also fast. Algorithms were able to spot what was going on, and to see a buying opportunity. In previous years, [in a situation like 6 May] the markets would have had to close for the rest of the day.’
This is my latest research report looking at the buy side’s usage of trading technology. See the press release below, the executive summary at tabbgroup.com and coverage of the study from Securities Industry News and Advanced Trading.
NEW YORK & LONDON – (Business Wire) According to new research from TABB Group, the integration of order management (OMS) and execution management system (EMS) functionality is now the driving force in streamlining the buy-side’s desktop. Although nearly 50% of the buy-side trading community receives OMS and EMS technology at virtually no direct cost through their broker relationships, TABB forecasts a 5% and 1% CAGR (compound annual growth rate) in OMS and EMS technology spending, respectively, between 2010 and 2012, by buy-side firms.
With 100% of TABB’s research study participants now using an OMS, EMS or both, the buy side’s top priority, says Kevin McPartland, senior analyst who authored the study, “The Buy-Side OMS and EMS: Integration, Expansion and Consolidation,” has switched from widgets and algos to integration. “With an eye on the middle office, back office, reference data system, analytic package or real-time market data, the trading-floor bouncer is working hard to throw double keying out the back door.”
However, McPartland notes, brokers’ ability to provide trading platforms gratis to all of their buy-side customers will shrink in the next three to five years as TABB Group believes the buy side will begin paying for these connections as brokers follow a cost-conscious approach to order-flow acquisition. They also believe that the 3% fewer buy-side firms using broker-funded EMSs in 2010 than in 2008 signals a trend. A strong increase in spending hard dollars for platforms further highlights the model shift. “While existing practices will not die, in the future, brokers will be as willing to foot the bill for connectivity as a guy is to foot the bill for dinner after a bad date.”
McPartland says that adoption rates show US equity-focused, buy-side firms rely completely on front-end trading technology. “In 1996, adoption levels were at 96%. Four years later, we’re at 100% and while that 4% jump might not appear large, it represents 400 to 500 new customers for platform providers. For OMS/EMS providers, competition is fierce. Even though black boxes now generate a disproportionate amount of volume, trading systems act as the gas, brake, steering wheel and airbag. With no cash-fort-clunkers program in sight for Wall Street, innovation, integration and old-fashioned customer service are factors in how vendors differentiate themselves and determine which car the buy-side drives.”
He also points out that the average number of EMSs on the buy-side desktop dropped from an average of 3.4 in 2008 to 1.6 in 2010 due to management demands for greater execution efficiency, true multi-broker access via a single platform and a push by EMS providers to be one-stop shops.
Analytics, charting, algorithms, risk management, P&L calculations and other core trading-system functions will see incremental improvements over the next several years, and that multi-asset and multi-geography access will become more common and robust as platforms once focused on a single market or asset class expand outward. “Co-opetition between platform providers will grow,” McPartland says, “and become more contentious due to expansion into new areas that will step on toes and strain partnerships.”
The most dramatic changes will take place under the covers, he adds. “Integration between EMS, OMS and the other systems that make up the complete trading lifecycle is the hottest issue for buy-side firms, and providers will need to work diligently to ensure inter-system connectivity is seamless and quick to implement. However, despite the efforts of some to merge the OMS and EMS into a single platform, messaging technology and protocol standards will allow disparate systems to communicate as if they were one.”
He notes, though, that there is no consensus between buy-side traders concerning their desire to merge the OMS and EMS into a single OEMS, due to their concerns over adopting an unnecessarily complex system.
The 40-page study with 37 exhibits is based on interviews with 118 US-based buy-side traders, split approximately 50% among hedge funds and traditional asset managers. One-to-one discussions covered system usage, likes and dislikes, business drivers, changing requirements and what traders expect to see from OMS and EMS providers going forward.
The study is available now for download by TABB Group Research Alliance Equity clients and pre-qualified media athttps://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write toinfo@tabbgroup.com.
A video summary of the study is also available at TabbFORUM, www.tabbforum.com, the online community for capital markets professionals.
Its not new news that exchanges are increasingly touting the low latency of their infrastructure as a reason to trade with them. This article has a few good stats as to what low latency actually is:
Kevin McPartland, senior analyst at financial markets research firm Tabb Group, said: “Top US equity exchanges are matching orders in sub-200 microseconds,” that is, 200 millionths of a second.
He added: “It takes less than 100 microseconds for a co-located server, a machine in the same building as the exchange’s equipment, to get an order to a matching engine, software that matches bids and offers to make a trade.
Full article at www.eFinancialNews.com
From the Sunday edition of The Record, a interesting article focusing on the move of “Wall Street” to New Jersey. The vast majority of US equity order matching actually goes on somewhere in NJ, regardless of where the exchange itself is officially incorporated. If it wasn’t for the relatively small bit of trading that happens on the NYSE floor on Broad Street in Manhattan, it would be safe to say all US equity trading happens in NJ:
“NYSE is looking to move the epicenter of U.S. capital markets from Broad Street to Mahwah,” said Kevin McPartland, a senior analyst with the Tabb Group, a New York consulting and researching firm. McPartland estimates 8.5 billion shares are traded on U.S. equity markets every day.
Full article at NorthJersey.com
Who would have guessed a magazine for scientists would be reporting about a market crash, but with so much equity and listed derivatives trading driven by algorithms and trading strategies designed by scientists the connection is not as far as it may seem.
Algorithmic trading is well established, but the speed at which trades are executed – usually milliseconds – is shrinking fast: by a factor of 10 since 2007, says Kevin McPartland at Tabb Group, a firm based in Westborough, Massachusetts, that studies financial markets.
Full article at NewScientist.com
Everyone is still trying to understand what happened on May 6. Stub quoting was certainly not the overall cause, but might help to explain why a few stocks went to a penny.
“If we end up with the trading curbs across all the trading exchanges that have been discussed, it would make this become a non-issue,” said Kevin McPartland, a senior analyst with research firm Tabb Group.
Full article at MarketWatch.com and WSJ.com
What else can derivatives be blamed for? OTC equity derivatives are now in the spotlight of the IRS for promoting tax avoidance. The theory is that an equity swap allows the purchaser to collect dividends on the “swapped” stock without paying the taxes associated with actually owning that stock. I can certainly see the merit in the IRS’s argument, but where do we draw the line between tax avoidance and smart investing?
The trick is to make sure the money being spent to remove delays will be more than reimbursed by the profits achieved in the trading strategy that is improved by it, says Kevin McPartland, senior analyst at Tabb Group.
“If I’m spending $1M to get one microsecond faster, will I make ten times what I was making before?,” he asks. “Another way of putting it is to say that latency budgeting involves making sure, when you spend so much money over so many weeks on an upgrade effort, that you see multiple times the value spent in additional revenue.”
Visualizing the Stock Market with StockTouch
As a research analyst I don’t do much in the way of product reviews. Sure we compare and contrast business models, but in most cases we stop short of saying which product is better. This is because we’re not actually users of those institutionally focused products.
Well in this case it’s different. I recently began playing with a new iPad app StockTouch. (full disclosure: they gave me a copy of the app so I, Kevin not TABB, could review it). No matter what market you’re trading in or watching the amount of data available and necessary to keep up keeps getting more and more ridiculous. Hence the proliferation of visualization tools. I remember seeing demos of early stock market data visualization products back in my days at JPMorgan. They were certainly very cool, especially back in those dot com times, but the reality was no trader or analyst was really going to use them. The cultural desire to change just wasn’t there and the quite frankly neither was the software. Finally times are changing.
StockTouch does a great job of providing a view of the entire US equity market (and any particular stocks you want to watch) in a very clean, easy to use interface. They expand on the tried and test green is good and red is bad approach, meaning that by glancing at a sector or two it becomes quite clear where the days market sentiment resides. This works great intraday but also over customizable time periods. My colleagues and I were able to figure out how the whole thing worked without reading any “user manuals”, which is in my eyes a requirement for any iPad app: a toddler (or junior analyst) should be able to make it work in a matter of minutes. StockTouch passes there.
They do however still have some work to do. In entering the symbols in my portfolio it became quickly clear that ETFs are yet a part of the system. They say they are working on that, but in the mean time it’s a big gap. One other key element that is needed to make StockTouch a slam dunk download – integration with your brokerage account. Allow me to not only pull in my portfolio but place trades, and things get really interesting. Clearly this is an app focused at retail investors for now, but in the institutional world platform integration is often the key feature asked for by traders; integration with middle and back office systems, integration with every exchange on the planet, even integration with in-house CRM systems. Luckily for StockTouch the retail world is a little less complicated, however I still thoroughly appreciate the legal and technical challenges of linking the interface to e*Trade or ScottTrade.
But in the end, both institutional and retail brokerages are after one thing – flow. And if this app can bring it than they have no reason not to embrace the possibilities.
If you frequently trade single stocks in your personal account or are just a stock market junkie, StockTouch is well worth the couple of dollars on iTunes. If your goal is to occasionally manage your portfolio, wait until ETF data and trading integration come on line.