Proof of artificial intelligence exponentiality

Proof of artificial intelligence exponentiality

I have been studying Artificial Intelligence (AI) for Capital Markets for ten months now and I am shocked everyday by the speed of evolution of this technology. When I started researching this last year I was looking for the Holy Grail trading tools and could not find them, hence I settled for other parts of the trade lifecycle where AI solutions already existed.

Yesterday, as I was preparing for a speech on AI at a conference, one of my colleagues in Tokyo forwarded me an Asian newswire mentioning that Nomura securities, after two years of research, would be launching an AI enabled HFT equity tool for its brokerage institutional clients in May –  here it is: the Holy Grail exists, and not only at Nomura. Other brokers have been shyly speaking about their customizable smart brokerage, e.g. how to use technology so that tier5 clients feel they are being served like a tier1. Some IBs are working on that, they just don’t publicly talk about it.

Talking to Eurekahedge last week I realized that they are tracking 15 funds that use AI in their strategy, I would argue there are even more than that because none of those were based in Japan (or Korea where apparently Fintech is exploding as we speak).

All this to reiterate that AI is an exponential technology, ten months ago there were no HFT trading solutions using AI, and we thought they were a few years away but no, here they are NOW. And the same with sentiment analysis, ten months ago they were just a marketing tool, now they are working on millions of documents every day at GSAM. Did I forget to mention smart TCA that’s coming to an EMS near you soon?

Stay tuned for more in my upcoming buy side AI tools report.

Regulating HFT in US Fixed Income markets

Regulating HFT in US Fixed Income markets
The recent report by the US regulators on the high levels of volatility in US treasury market on October 15 last year has raised almost as many questions as it has answered, not necessarily because it is controversial, but because this is an area that required greater attention from both regulators and market participants. This report can be seen as a part of an on-going process in the industry to improve its capabilities to handle the advanced technology being used for trading today. One of the recommendations of the report was to have new registration requirements for automated traders. In a market where most leading participants and new tech-savvy entrants are using advanced high frequency trading technology, mere registration would not deter or suffice. The emphasis should be on revamping the risk management protocols and the regulators’ risk management and surveillance systems. The regulators also touch upon these issues in their report when they stress that there were a number of factors at play in the wild swing on October 15. Hence, it is important to focus on this aspect than create deterrents for new or innovative market participants.

Beyond HFT

Beyond HFT
I recently attended the Tokyo Financial Information Summit, put on by Interactive Media. The event was interesting from a number of perspectives. This event focuses on the capital markets; attendees are usually domestic sell side and buy side firms and vendors, including global firms active in Japan. This year there was good representation from around Asia ex-Japan as well; possibly attracted by the new volatility in Japan’s stock market. The new activity in the market was set off by the government’s Abenomics policies aimed at reinvigorating the Japanese economy. But I suspect the fact that Japan’s stock market is traded on an increasingly low latency and fragmented market structure gives some extra juice to the engine. Speaking of high frequency trading, Celent’s presentation at the event pointed out that HFT volumes have fallen from their peak (at the time of the financial crisis) and that HFT revenues have fallen drastically from this peak. In response to this trend, as well as the severe cost pressures in the post-GFC period, cutting-edge firms seeking to maintain profitable trading operations are removing themselves from the low latency arms race. Instead, firms are seeking to maximize the potential of their existing low-latency infrastructures by investing in real-time analytics and other new capabilities to support smarter trading. HFT is not dead, but firms are moving beyond pure horsepower to more nuanced strategies. Interestingly, this theme was echoed by the buy and sell side participants in a panel at the event moderated by my colleague, Celent Senior Analyst Eiichiro Yanagawa. Even though HFT levels in Japan, at around 25 – 35% of trading, have probably not reached their peak, firms are already pulling out of the ultra-low latency arms race–or deciding not to enter it in the first place. The message was that for many firms it is not advisable to enter a race where they are already outgunned. Instead they should focus on smarter trading that may leverage the exchanges’ low latency environment, but rely on the specific capabilities and strategies of a firm and its traders. Looking at this discussion in a global context, it seems interesting and not a little ironic that just as regulators are preparing to strike against HFT, the industry has in some sense already started to move beyond it.

FX Spot IDB Trading Platforms: Competition is Heating Up

FX Spot IDB Trading Platforms: Competition is Heating Up
Last week the media was inundated with the very interesting news that EBS (part of ICAP), one of the leading global wholesale FX electronic platform, was starting a consultation with its clients to change its business model: it would potentially remove the “first in, first out” (remember that FIFO rule in accounting?), for entry order and put a system that batches together all orders that arrive in a given millisecond-based window so that there is no speed advantage for incoming orders, reflecting the industry trend to try to curb potentially damaging HFT flows. This significant change of strategy, for an FX platform which opened direct access to funds ten years ago, follows its move last autumn away from “decimalization”, so that the fifth decimal point in a quote had to be a “5” or “0”, rather than increments of a 10th. Its aim is to keep having the buy side tap in their liquidity pools, but in a way that is safe for the dealers providing liquidity, as highlighted in our March 2013 report The Blurring of the IDB vs. D2C Models in Fixed Income and FX: Emergence of a Convergence?. The randomization of trade entry can also be found on another Spot FX trading platform, ParFX, run by competitor IDB Tradition, with the backing of a consortium of 11 global banks. It has launched on April 18th 2013 and trading is already live. ParFX not only randomizes the value of a trade entry so that it gets matched in an unknown order, but it is also designed as a fair trading venue with an anonymous Central Limit Order Book single matching engine offering executable prices (no second look), that actually even releases the name of the intermediated fund once execution is done to the other trade party, as opposed to the traditional Prime Broker (PB) model whereby the PB keeps anonymous the name of the client fund it has intermediated all the way to settlement. In ParFX the PB uses its name just for the  settlement. Another differentiating factor to try to promote fairness is the pricing: at ParFX a global bank like Barclays and local bank in Italy pay the same fee (2000 US$/month) to access ParFX’s standard FIX interface that provides the APIs to standard market data consumption, order entry FIX session and post-trade services – Drop-copy. They also pay the same brokerage fee (2US$ per US$ equivalent), no discounts for large sizes or levy for price makers. An All-to-All, level-playing-field platform. Have we mentioned that TulletPrebon, another leading IDB, had also launched a competitor  FX Spot platform called tpSPOTDEAL? And what about Thomson Reuters? Will they merge the FXAll multidealer-to-client activities they acquired with their wholesale platform in some way or another? Competition is fierce in the revolution of FX Spot trading. We will certainly keep watching this space…

Innovations in OTC block equities: A new venue called Squawker

Innovations in OTC block equities: A new venue called Squawker
Squawker is a new venue based out of London for trading of OTC stocks (among other listed products like ETFs and warrants) focusing on the approximately 10-15% of equities that trade OTC in Europe according to AFME. Squawker (the title is based on the old squawk box) is not yet launched but what is most interesting is that it is focusing on an area that tends to be overlooked amidst all the focus on algorithmic trading/HFT where average trade sizes tend to be small and continue to decrease. Squawker focuses on institutional-size blocks between the sell-side and allows for IOI orders and FIX messaging plus private negotiation with minimum size. It is regulated under the FSA. The most interesting aspect is the ability to support the workflow of human interaction through electronic means- through instant messaging or chat technology which allows for exchange of details, negotiation, and matching. It is always a positive to see firms focusing on established markets (equities) in which technology is pervasive and numerous models thrive and support the market, but where there is a gap in the market (in this case block trades) and where greater efficiency can be created and liquidity can become easier to find by lowering search costs (i.e. electronic vs. voice).

Electronic trading in India: Funny how these things work

Electronic trading in India: Funny how these things work
I recently attended TradeTech India, held in Mumbai. In the last couple of years, there has been a lot of excitement about electronic trading. Direct Market Access (DMA) got approved in India in 2008. Smart Order Routing got the go-ahead in 2010. But algo trading in the country really got a shot in the arm when co-location became available in 2010. After this, there were a spate of offerings from all the leading brokerages, global and local, for the buy-side to avail of. In a number of events in 2010 and 2011, including TradeTech, the discussion had centered on how the Indian buy-side had to be converted to the idea of algorithmic and high-frequency trading. Well, that is the case no longer. At the latest event, the message from a number of brokerages was rather different. It is no longer about converting a reluctant buy-side to more algo trading. If anything, the problem is that almost all the leading buy-side firms have been completely converted to the idea. No, the problem now is that they consider algo trading and HFT as a lower cost version of its manual counterpart. Hence, instead of providing higher volumes to get lower prices, they believe that they should get lower prices come what may. The result is that the leading brokerages and vendors are now facing the ironical situation where they have created a market, but are unable to serve it at the expected price-points. However, while this is bad news for some, it can be good news for others. If some firms can become more flexible in their pricing, then there is a whole new market for algo trading technology that is just waiting to be exploited in India. This could be a great opportunity for small firms and start-ups to get their business going and to gather sufficient volumes to be able to exploit the economies of scale. The other side of the coin is that the need for cheaper algo trading might mean that several smaller brokerages and buy-side might decide to develop their own algo trading solutions, as often they already have the financial and technological expertise in-house. All in all, it seems that an important segment of the Indian market is once again coming up with its own innovative solution to a new problem, confounding those who expected it to fall in line with global trends. It is ready to adopt more sophisticated electronic trading, but not necessarily at the same price as some other markets. The challenge for global players is to see whether they can take advantage of cheaper costs locally to create a hybrid product that would serve the requirements of their local clients on an on-going basis, without undermining their own margins and profitability.

FPGAs in High Speed Analytics Applications

FPGAs in High Speed Analytics Applications
Field Programmable Gate Array (FPGA) technology has been receiving a lot of attention in the high frequency trading community in recent months. It is essentially a hardware-based technology pioneered by scientists in the semiconductor/electronics industry. FPGA, as its name suggests, consists of programmable logical gate arrays, which can be used to implement desired logical functions on a piece of semiconductor chip. The beauty of this technology is that the desired logical functions are implemented at the hardware level itself, unlike conventional software based methods where analytical functions are implemented by software processes queuing up and waiting for a slice of the processor’s time. The hardware based method is much faster, and especially at a time when high frequency trading institutions are looking for latency advantages in the order of milliseconds, the technology provides significant competitive advantage. We are therefore witnessing a great deal of interest, and not surprisingly HFT institutions are investing resources on FPGA related technology R&D. However, the market for FPGA based analytics for HFT applications is still at a nascent stage. While the advantages of FPGA to HFT institutions such as ultra-low latency and reliability are appealing, the downside to this technology viz. time and cost of fabricating, limited ability to handle complex logical operations will prove to be bottlenecks. As mentioned, the technology is borrowed from the semiconductor/electronics industry where significant advancements have already been made in dealing with technology-related bottlenecks, leaving out factors such as cost constraints and difficult regulatory environment as major factors that will decide the future of this technology.

MiFID II: Crucial times ahead for European capital markets

MiFID II: Crucial times ahead for European capital markets
The next piece in the global regulatory jigsaw is falling into place. The proposed MiFID II published by the European Commission (EC) is going to substantially reform the exchange-traded and OTC markets. Some of the important issues it discusses include the impact and regulation of high frequency trading (HFT), the role of organized trading facilities and dark pools and also competition in exchange-traded derivatives. HFT has been controversial for some time, and the regulator has taken the stand that it needs to be dealt with a firm hand. The possible restrictions that would be placed on HFT players as a result would have the effect of further reducing their profitability in an already competitive market. HFT in markets such as the US and Europe has become commoditized and is no longer as attractive as it was a couple of years ago. We expect the new proposals to speed up the process of players looking at new markets such as Asia and Latin America for higher revenues. Also, the measures recommended to ensure liquidity in a volatile market are quite controversial and might not necessarily be feasible for all types of players. They would have to be carefully enforced to enable the market to perform without suffering from large distortions. The organized trading facilities (OTFs) would be a means of providing greater transparency and standardization in the OTC market. They would be the European equivalent of the swap execution facilities (SEFs) introduced by the Dodd-Frank Act in the US. The OTFs would also deal with the cash equity markets though and one of their important roles would be to make ‘dark pools’ more transparent and accountable. Again, a problem that can arise is that the new changes might make it difficult for existing dark pools to compete with the other types of trading platforms and might be detrimental to the growth of the industry. With regard to OTC derivatives, the proposals are certainly a positive move and will help reduce systemic risk in the large OTC market. Finally, the proposal to enhance competition in the exchange-trade derivatives market under the accompanying regulation, called Mifir, by reforming the post-trade processing, including clearing, would be a welcome development. While there would always be some players that are opposed to such measures, as a neutral it is clear that competition is desirable and would lead to greater innovation and efficiency in the market. Hence, all in all, the new proposals are an important step in making the European and global capital markets more robust and efficient and we can look forward to their implementation.

Challenging times ahead for buy side OMS vendors

Challenging times ahead for buy side OMS vendors
The buy side Order Management System (OMS) market has been going through a period of transition. It has had to cope with the aftermath of the financial crisis and the need for improved technology for multi-asset trading and also high frequency trading. While the buyside is very well aware that there would always be best-of-breed solutions for different asset classes and requirements, they are interested in having a solution that allows them to meet most of their needs and minimizes their requirement for an Execution Management System (EMS) wherever possible. Hence, it is becoming more challenging for the leading OMS vendors. There are some other challenges that are also affecting the choices of the buy-side firms for OMS products. The falling margins and rising costs due to volatility mean that clients are demanding value for money in a manner seldom seen before. The business and pricing models of the industry are changing and vendors are having to become much more flexible in their approach. While the leading vendors are still growing and acquiring new clients, the competition has become more severe. In the last few years, the acquisitions of LatentZero by Fidessa, Eze Castle by ConvergEx and Macgregor by ITG, while often taking advantage of the synergies between OMS and EMS, not to mention sell-side and buy-side OMS, have created a more compact market where the continuous innovation has become the key. Importantly, there has been a stagnation in demand for OMS in leading markets in the US and Europe. Due to the economic uncertainty, we believe that this is expected to continue for the next couple of years. There will be a growth in demand from Asia that will partly compensate for it, but the Asia-Pacific market will take time to mature and would also require the OMS vendors to set up their offices in the region from both a business development and customer service point of view.