Sell-Side Electronic Trading:
Industry Reacts to New Generation of Hackers | A New Way to Attack Market Data Costs | The Hidden Cost of Trading | In Fixed Income, FIX Is a Post-trade Solution | Algorithms Multiply to Match Trading Strategies |
Upgrading the Infrastructure to Improve Client Ties and Lower Risk
November 21, 2006
Wall Street firms may not face the kind of operational nightmare that, in the late 1960s, forced the New York Stock Exchange to close on Wednesdays for several months to allow them to process mountains of paper certificates that piled up in back offices. But soaring electronic trading volumes and demands to support increasingly complex, global and multi-asset-class investment strategies are putting unaccustomed stress on trading platforms and market data systems.
They're suffering the consequences of "two dominant themes that have overseen the development of trading systems over the past ten years," said Kevin Bourne, global head of equities execution for HSBC in London. "One is that a highly siloed approach has been taken to asset classes. The other is regionalization--people built systems based on a regional P&L [profit and loss]." Many sell-side firms are grappling with a hodgepodge of systems with little in the way of a common architecture, and until they upgrade and rationalize those architectures, they will suffer continued inefficiencies and face operational risks.
Bourne believes that when times are good in the securities industry, as they have been amid rising markets this year, many firms take their minds off such concerns. He suspects that the next market downturn may expose the costs and inefficiencies lurking in the trading infrastructure. "As an industry, we have to move much closer toward the transparent manufacturing cost model, because cost-income ratios have become too narrow," Bourne said.
Institutional clients, however, are clamoring for what siloed architectures don't permit to happen: a unified trading platform that reaches across asset classes and geographies. "When you have the largest asset managers telling brokers that unless you can do this we're not going to do business with you, that causes things to happen," said Bryan Street, managing director in equities trading for CIBC World Markets in New York. "Broker-dealers aren't going to just go spend money to make this happen on their own."
Bourne said that clients are focusing on better ways to use the electronic platforms that the sell side has been deploying. "A client can say to me, If you want to maintain a relationship with my firm, here's what I want. I want to execute a cross-currency basket pair, and I want half the basket to be hedged with futures. I want the lagging risk on the currency exposure to be hedged, and at every single fill I want the FX trade done at the spot price automatically,'" said Bourne. What the client regards as a single transaction, he pointed out, the sell side sees as "three automated trading process on a single FIX connection, a very complex product delivered with real-time market data across multiple markets. It takes them five seconds to describe it, but it takes you five hours just to think about how things are going to have to hang together."
Unification Effort
HSBC started down the road to a common platform in 2004, when it began to standardize its equities trading globally on version 5.0 of London-based royalblue's Fidessa system. The project's rollout is in its final stage, with the connection of the bank's trading system to Abu Dhabi, Dubai and Kuwait at the end of October, and the second part of a two-step conversion of the Tokyo office scheduled for the last week of November. "We made some fundamental decisions," said Bourne. "The world is the same, every market is fundamentally the same. The entire system we have in equities is replicated as one system globally. I can sit on the desk in London and see the firm's trading globally."
