An Independent View
Independent software vendors used to be known for the trading screen software they provided to customers. But with the growth of super high-speed trading and co-location services by exchanges such as CME Group, these firms are becoming much more to their customers.
In today’s markets, the focus is on speed, speed and more speed. But what’s next? As exchanges continue to provide speed functionality and new products to their platforms, independent software vendors (ISVs) see themselves as an integral part of the overall trading chain, especially as their services continue to grow.
ISVs have evolved into multi-purpose, multi-faceted technology firms that provide everything from the trading screen to the networks that connect firms directly to exchanges, to the co-location services that allow trading that is faster than a blink of an eye. The number of ISVs over the past several years has dwindled amidst tough competition and consolidation. But among those who have survived, technology and services have expanded dramatically with an eye toward new functionality and better risk management tools.
“There are really only a handful of viable, global ISVs that are serving the industry today,” says Diane Saucier, vice president, market development at Trading Technologies (TT). “And I think we’ve seen a trend toward a best-of-breed model evolving over the past several years. We see ourselves as a service provider, not just a software provider.”
Indeed, ISVs have evolved from firms that provided a trading screen, or front end, that allowed point-and-click trading on a number of different markets. Today, firms such as TT, Realtime Systems Group (RTS), Patsystems and FFastFill each have spent tens of millions of dollars on trading infrastructure that makes high-velocity trading possible in a variety of ways.
Your Connection
Perhaps the biggest trend in trading is the ongoing growth of algorithmic trading systems. These computerized trading models often trade thousands of times per day without any human intervention. Such “black box” trading relies heavily on speed, which is where exchanges and ISVs have worked together to make this trading happen.
As more exchanges have offered co-location services and functionality on trading platforms that cater to algorithmic traders, ISVs have built-out or partnered with various telecom firms to provide connectivity to exchanges around the world. RTS, for example, offers connectivity in more than 100 markets worldwide to more than 50 exchanges, including CME Group. This includes co-location services, as well as proximity services in which servers are placed near an exchange but not physically next to exchange servers as they are in co-location. Other firms also boast a broad swath of connectivity and high-speed services. TT has invested more than $90 million into building out TTNET, a global network that provides firms with connections to markets around the world. Patsystems, FFastFill and other ISVs also offer these networks because the trend is that more firms want to connect to multiple exchanges and trade multiple asset classes.
One of the main reasons connectivity and co-location services have been so worthwhile for ISVs is that, even in the best of economic environments, trading firms cannot afford to shoulder the information technology costs of connecting to all of those markets by themselves.
“You’ve got some large firms that have enough money to do everything themselves, but there are a very small number in that category,” Saucier says. “So the vast majority of firms are looking to their vendors to help them have that sort of access.”
What is interesting about the connectivity and co-location services space is that firms are basically on an equal footing, as more adopt similar services and achieve similar speeds. In other words, co-location has provided a technology edge in recent months but that window is quickly closing among the high-velocity trading firms.
“With co-location and proximity services, you can get as close as you can,” Saucier says. “But if you and all of your competitors are as close as you, then you’re back at square one.”
So firms are pushing other technology and trading enhancements that allow traders to trade spreads more easily on multiple exchanges, or write code that makes it easy for algorithmic trading firms to connect to the ISVs’ networks. RTS, for example, created a technology service called RTD Tango in 2005, which allows trading firms to code, launch and test thousands of algorithmic trading strategies simultaneously on the RTS global network of markets.
Alex Lamb, RTS’s senior vice president, business development, agrees that co-location and proximity services by exchanges have largely leveled the playing field for computerized trading. Now he says that creating and implementing winning algorithmic trading strategies is getting harder.
“The half-life of the winning trades is getting shorter,” Lamb says. “So your ability to develop, employ and exploit those strategies becomes difficult because you can’t modify your code quickly enough. Most of these trading platforms have to be taken out of service, modified and then redeployed.”
To address that issue of quickly retooling trading strategies, RTS announced a deal in March with The Mathworks, a software and technical modeling firm. This allows firms to test out ideas with their statistical functions so they can create, test and launch new trading models in a shorter period of time, perhaps as little as a day, Lamb notes.
Risk in Business
Another area attracting more attention from various ISVs is risk management. Given the current economic crisis and heavy focus on credit worthiness and risk exposure, some ISVs are offering more risk management services than ever.
“Yes, the number of algo traders is growing and the interest in co-location is increasing, but I wouldn’t say it is the number one dominant factor that is impacting our overall business,” says Keith Todd, chairman and chief executive officer of FFastFill. “There are other critical factors such as risk management, and risk management of algo engines.”
FFastfill has been assembling a beginning-to-end technology company over the past several years. Besides its front-end trading software, the firm offers risk management and back-office services as well.
“Historically, the back office was the central universe for risk management, but it has been much more of an after-the-fact basis and in many cases, it’s been on an end-of-day basis,” says FFastFill’s Todd. “Now by offering services in the front, middle and back, we can offer the firms the ability to run full SPAN margining on their latest held position as well as positions across their portfolio. That’s critically important today with cash margin calls as well as exposure risk management.”
FFastFill is not the only ISV to offer risk management services. RTS and Patsystems also offer risk management technologies. David Webber, chief executive officer of Patsystems, says his firm has invested heavily in the risk management technology side of the business for several reasons. ISVs provide value in terms of maintaining costly risk management technology. But the speed in which trading now occurs also requires firms to monitor risk in realtime.
“It’s a very important part of our business and the fastest growing part of our business,” Webber says, adding that it has nine customers signed onto its Risk Informer service with another three or four firms expected to license the product this year.
“It’s a symbiotic relationship and one cannot be successful without the other,” Webber continues. “And part of why the CME Group is so successful is that they are very good about engagement with ISVs.”
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