Capital Markets Industry Demands Unique Approach to IT Strategy

Stephen Cooper, Head of Technology, Liquidnet
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Stephen Cooper, Head of Technology, Liquidnet

In the world of capital markets, specialized areas such as electronic trading and risk management are so demanding of computing resources and critical to the business that they frequently call for unique computing platforms. This often includes advanced technology not yet found in commoditized IT environments. For example, firms in the high frequency trading arms race are starting to use microwave transmission to communicate with markets faster than their competition can. Pricing and risk management teams have been consuming advanced technology to crunch their models and simulations for years. Even the modern day equivalent of financial garage firms, the bitcoin miners, are buying up high-end GPU power as fast as it can be printed.

"Investment in service orientated architecture needs to be carefully managed to avoid being saddled with barriers and duplication across platforms"

It is no surprise that financial services firms have typically been early adopters of hardware innovations, such as high-throughput network backbones, sub-microsecond latency monitoring equipment, and Field-Programmable Gate Array (FPGA) cards, with the largest firms often leading or driving the research and development within the computing industry. However, depending on the size and scope of your organization, these technology considerations can dominate the attention of management or at the other extreme may be somewhat limited to specific lines of business or functions. Therefore it is important for CIOs of capital markets firms to understand, manage, and communicate the distinctions between areas that can be materially sensitive to advancements in technology, and other more traditional service areas. A good understanding of these dynamics is key to having a successful strategy that includes appropriate architecture, proper (if any) use of hot commodity services such as cloud services, and strong partnerships in the industry.

Architecture

Some of the biggest non-government consumers of advanced computing technology are often defense contractors who clearly require significant investments in property, plant, and equipment. Within the capital markets industry, this investment may not seem as obvious. One reason is the information-centric nature of capital markets which often leads to close interaction and even gray areas between platform-sensitive systems and other resources. Another reason is that these advancements often represent short-lived competitive advantages that decay over time and then get replaced by commoditized or vendor-supplied solutions comparable to corporate technology. For example, the growth in Linux-based trading systems led to a somewhat transient cottage industry of vendors of hardware-based market data processor cards designed to circumvent bottlenecks in the Linux operating system.

Successful CIOs in capital markets understand these dynamics well and know that the overall technology architecture must allow for safe, rich integration across boundaries between platform-sensitive and other systems. A clean isolation layer, for example, protects trading systems from the strains of back office feeds, queries, and reports, or prevents heavy spikes in market data from grinding clearing and settlement systems to a halt. Secure environments or “sandboxes” enable advanced computer resources to be deployed in ways that may break with standards. And in some cases they may even raise ownership and governance questions as did the advent of NoSQL technology with respect to the traditional DBA function. Ask any veteran technologist in the capital markets industry about what is required to support the quants (quantitative financial engineers) and you will understand this point.

At Liquidnet, we recently completed a global rollout of a new algorithmic trading infrastructure along with a new trade capture layer to support our institutional trading network. This new infrastructure provides a clean, rich, and near-real-time interface to downstream systems. It also allows us to reduce the risk and cost of rapid changes and innovations within the trading environment by isolating that hotbed of activity from myriad downstream systems. unfortunately, it’s rarely feasible or commercially viable to completely isolate various spheres of computing so the organization must remain vigilant and manage the risks.

Use of Hot Commodity Services

Proper decoupling allows for opportunities to engage with IT vendors such as cloud providers to achieve goals associated with the migration to the cloud. While capital markets firms are at the forefront of “fancier” models like market center colocation, they are not rushing into the cloud when it comes to areas like electronic trading. In fact, specialized trading Platform-as-a-Service providers are trying to make a market somewhere in the middle. A complex firm may have several different combinations of highly customized environments and several platform and cloud providers. And the investment in service orientated architecture needs to be carefully managed to avoid being saddled with barriers and duplication across platforms.

At an increasing number of big players, there’s a growing need for cloud governance solutions due to the sheer complexity of different performance requirements, not to mention compliance regimes.

Strategic Partnerships

Another key element is having strategic partnerships with the industry and today, vendors expect to offer highly custom solutions. For example, order management system vendors work closely with their clients to provide highly customized solutions to support each trading desk’ sunique workflows.

Firms that are innovative in electronic trading will also benefit from involvement with standards-setting bodies, like the FIX Protocol League, that sets industry standards for messaging in the electronic trading space. And firms are most successful when they partner with other market participants, such as when asset managers partner with their brokers and liquidity providers to achieve their technology goals, or when data providers integrate their products with each other to provide better solutions forthe industry.

At Liquidnet we recently introduced the first FIX-based clearing confirmation/affirmation workflow in the industry, which would not have been possible without close coordination with the standards body and a strategic client.

The capital markets industry is a field driven as much by raw technology performance and innovation as any other field. A smart CIO, CTO, or technology executive recognizes this quickly and is thinking well beyond classic IT strategy. Proper understanding of this leads to effective system architecture, successful use of leading technology, and strategic engagement with partners and the industry to help manage cost and complexity, and ultimately enable technology-R&D-driven businesses.

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