http://www.hcltech.com/financial-services/overview~ More on Financial Services The stage is set for some major changes in trading in the years to come. One glimpse at the trading scenario will give you enough proof that algorithmic trading volumes have gone through the roof. Regulations like MIFID, implemented in November 2007, are threatening to change the way in which banks trade. And the changes are happening fast. The trading community firmly believes that this trend is here to stay. On the other hand, the rapid changes of excessive peaks, troughs and volatility in the recent market fall outs have been blamed on the black box trading techniques. 

1. Future of the Trading Platform
Associate General Manager – Capital Market Services
Narayanan V
Introduction
The stage is set for some major changes in trading in the years to come.
One glimpse at the trading scenario will give you enough proof that
algorithmic trading volumes have gone through the roof. Regulations like
MIFID, implemented in November 2007, are threatening to change the
way in which banks trade. And the changes are happening fast. The
trading community firmly believes that this trend is here to stay.
On the other hand, the rapid changes of excessive peaks, troughs and
volatility in the recent market fall outs have been blamed on the black box
trading techniques.
If you look from the telecom industry’s perspective that caters to the
needs of the trading industry, there are major changes that are sweeping
in with customers asking for more bandwidth, storage and data centre
services. In the last 18 months alone, several trading houses upgraded
most of their exchange connections by 500% to handle the increased
market data and trading volumes.

2. Algorithmic Trading Challenges
The impact of algorithmic trading has been With these challenges of algorithmic trading, industry players
discussed time and time again. The idea of are also facing other challenges – that of co-location, attention
being able to automatically build into algo black to detail and catering to the ever-changing needs of the client.
box trading strategies - a switch to the trading
One of the services that major exchanges are offering is called
blocks that is based on automatic updates
co location. This is an attempt to work around “the speed of
coming from news tickers - means building
light” by allowing people to put very resource hungry
towards an automatic market place that
applications very close to the exchange’s trading engines
switches, routes and smarts the orders around
rather than having that tiny extra latency of sending large
the market without any human involvement with
quantities of messages from the bank’s trading engine to the
integrated trading strategies.
exchange’s trading engine.
But when we talk about algorithmic trading,
issues around security and end to end When it comes to attention to detail, the industry needs to pay
authentication are not far behind. Another key attention not just in terms of capturing business requirements
issue is the constant need to upgrade the to code them but also a keen eye for the application of the laws
infrastructure. This calls for a huge investment of physics.
into hardware, software, communications and Along with attention to detail goes constant attention to the
capacity. Constant upgrades to infrastructure changing needs of the clients. The clients’ needs have always
costs money, in addition to the end to end cost of been and will continue to be very heterogeneous. The clients
trading. are always going to be heterogeneous and the challenge for
This cost is double-fold with investment banks bankers and investment bankers is to find ways of meeting
paying huge sums to external vendors for those needs efficiently.
providing the infrastructure to keep the
The success of an industry where trading really occurs, be it
algorithmic trading going and the second set of
an exchange or a trading venue or, ECN will depend on how it
costs are costs about which the investment
responds to these five issues.
banks would dearly love to do more but they
cannot, which is the cost of complexity - the cost Latency
of a broken Europe, the cost of the absence of a The importance of dealing with the latency issues can never
single approach to regulation, market be overstressed. Latency means different things to different
microstructure issues, conduct of business. people and its definitions are many. But from a common man’s
The potential for a significant win in that area, as point of view let’s say you enter an order to buy or sell
a result of the Financial Services action plan, is whatever it might be and till you get the response, you do not
still in the “yet-to-be-delivered-box” as far as the know what has happened to that order. So if you say: “Buy me
industry is concerned. 100” and if the response you get is “Bought 50, 50 in the book”,
we are talking about serious latency issues here. And this is
one key area that has to be addressed. Since exchanges have
brought down considerably the time they take to accept,
process and confirm an order, traders too have responded
similarly.

3. Resolving latency issues and quicker execution Overcrowding and Risk Management
times is definitely high on the priority list and the The general trend is that trading venues don’t want to have a
players too are aware of this and the race to do large footprint on members or participants, whether it is
this is heating up. The key differentiators in this exchanges or ECNs, just to bring down the cost. This, to
space are network speed and location. Clients ensure that there can be consolidation on the service front or
call even just a five millisecond delay as an technical infrastructure front.
outage.
The other very important issue, of which we will hear quite a lot
Let’s look at it at a global level. The bulk of the in the future, is risk management. Today, if you look at the
capacity and trading that exists today around the investment decisions being taken by machines with extremely
world tends to go west; it goes via the US. It high speed and the order rates coming in at hundreds per
takes a 240 millisecond link to go from London second, the value at risk is extremely high on very low time
round to Tokyo via the US. If you go via Russia it scales. From that perspective, it is quite clear that there will be
is 60 milliseconds. So are we going to see all of drastic changes since it can’t be just the trading side which can
the trades going that way and what about the speed things up but also clearing and risk management
security implications of having all the trades
running via Russia? The Derivatives Exchange’s Stand
From a derivatives exchange point of view, the above
Consistency
mentioned success criteria are all different investment
It is not just enough to resolve latency, because
strategies. Not everybody needs this ultra-low latency and the
what the huge volumes with respect to number
other attributes. We have strategic investors who want to buy
of trades and values that we are seeing in the 5% or 3% of a company, maybe have a certain influence on
market during peak periods need high certain decisions at that company, who are thinking about a
consistency. So in such a situations when there much longer time scale. And they are not doing statistical
is too much of trading happening, the traders arbitrage.
except the same behavior from all IT
So we have different groups of investors and this is another
infrastructures; be it outside providers,
generalistic thing we will see in the future - that there is more
exchanges or ECNs. Here in lies the challenge.
diversification with respect to technology as well.
High-speed Market Data
But there are some who want to be in this high-speed game,
So it’s not only just knowing what your order has which obviously, comes at a cost. So as a result, we will have a
been doing, whether it has been matched or strong segmentation of the market.
you’re in the book, but also knowing where the
Another interesting trend that the market is witnessing today is
market is. All this, of course, consistently with
that of formation of electronic pits. Earlier, you used to have
low latency. Hence the need for high-speed
the pits with the traders, but today it is all service moving close
market data.
to the exchanges, around the globe. We will see this
happening not just on the trading front but also on the clearing
front. This calls for real-time risk management since the risk of
all these guys sending their orders at very high frequency is
only going to further burden the market.

4. Dealers: Are They Here to Stay? In the long-term, in the area of say more straight forward, plain
With all this automation catching up like never vanilla, high liquid products we will see less human interaction.
before, a section of the trading industry believes Only those who know how the automation machines work will
that dealers will disappear. But there are others find a place here. But on the other hand, products like complex
who believe that they will simply find new ways derivatives pricing, where you don’t want to fully rely on a
of doing business, more intelligently and with machine and where innovation is extremely important, the
more sophistication. But the debate rages on intervention of human beings is vital. Such kind of complexity
and the questions keep coming: deserves rational decision-making, which the machines lack.
Will algorithmic trading push the dealers
? What’s In Store?
out of the dealing room or will social More products will enter the foray
?
networking combined with low cost high In the coming years, we will see that more products will come
band (inaudible) change the whole nature on exchange or on large trading venues, which are at the
of trading and dealing? moment OTC, essentially to bring down the total cost of the
Will markets operate locally, nationally,
? process by means of standardization.
internationally or globally? Derivatives will boom
?
? the implications for market credit
What are The derivatives will continue to grow at enormous rates in the
operation and, most importantly, systemic future and eventually, we will see some global geographical
risks as a result? clustering of exchanges.
What technologies will drive the evolution
? If latency is really very important then it might lead to all the
of trading? services of the exchange or trading venues -- for example the
A recent IBM report on algorithmic trading and US’ equity market has lots of trading venues. New York is a
latency revealed that nine out of ten dealers natural centre for equities trading in the US.
would be out of their jobs by 2015. From a For the plain vanilla, high-liquid trading - which will be highly
trading house point of view, this might be automatic in the future and already is to some extent - industry
different for everyone and it depends on their will need people who have sound IT background and good
technology as well as how much the industry will understanding of the laws of physics.
move away from the human touch in investment
? Products and Skill Sets
Complex
market.
On the other hand, there will be a lot of complex products and
If you look at the automation story – it is a story the skill set that was good 10 years ago or 15 years ago to get
which is fundamentally about simplification. If a job in the financial industry will still hold good. The
you look at the Ford’s insight into the production demographics of who gets employed by investment banks
line, automation of production, and the have changed dramatically and more so in trading compared
prefabrication of buildings, we see a pattern to pure investment banking. There are enough indications to
here that of - deskilling jobs, making jobs believe that this will continue. The definition of a trader is
simpler, making jobs easily replicable & changing and the question is how many people are going to be
exportable. But however, this doesn’t employed by operations that do trading because it is all about
necessarily mean that the results of automation building systems, designing systems and using systems.
will satisfactorily suit the changing needs of the
client.

5. CRP – Consolidation, Rationalization and
? Proliferation - We are clearly on the cusp of some very
Proliferation dramatic changes in the trading landscape, the proliferation of
Consolidation - This is an extraordinarily trading venues. When there are multiple liquidity buckets you
difficult, expensive business to be in, not just for inevitably get fragmentation. This happens immediately upon
the sell-side but even the buy-side, who have the creation of these alternative liquidity sources but the fact
invested very heavily in their trading operations that the orders get smaller. So there will be an exponential
over the last few years. It’s entirely reasonable growth in data because they’re probably the only real
to expect that there will be something like the old beneficiaries of this. Digital news driving investment decisions
world where people on the buy-side looked to will lead to a whole new type of investment strategy and there
brokers to provide the science and technology will be more black boxes and they’ll do more insidious things
behind trading and we get into an environment when the markets get rocky. It’s all about incredible
complexity and the requirement, of course, for more people to
where people are competing on the objective
design and build systems to deal with it.
quality of what they’re doing because these
things, after all, measurable, are getting more Finally, let’s talk about black boxes, which made headlines
measurable. With dark pools and all the when things started to go bad. People took notice and turned
different things that people have to navigate off the black boxes and people decided when to turn them
through to do a best execution job, it’s entirely back on again. So it’s not just all robotic or automation.
reasonable to imagine a world where there are BATS
only five or ten providers of such a service. It will
The Better Alternative Trading System (BATS) in the US came
be, in any event, extremely complex and people
up with an aggressive pricing model and in just about a couple
will have obligations to demonstrate that they
of months had 20% market share. The New York Stock
have done as well as the pre-eminent providers
Exchange market share is plummeting. The critical thing to
of these services.
note about BATS is that it has something like 30 employees
Rationalization – It is extremely important to and the LSE has a lot of employees. It makes good business
look around and see what’s happening and to sense to start thinking about how industry is going to diversify
remember what exchanges were built for in the if a major competitor is undercutting from a price point of view
first place. This evolves a system of and doing it all on the basis of technology. Let’s face it - they
interconnected pools of liquidity that are don’t have fancy marble columns in their façade. It’s just a
effectively a playground for arbitrageurs and completely different model and if that is who their new
people who are not really fundamentally about competitor is they better be thinking about what’s next
investing in assets that they care about. If that is including potential barriers due to the local exchange
the way things have been and if that continues, it regulatory bodies or governing bodies.
will be difficult to understand exactly why we all
On the volumes front, every exchange is continuing to
have to invest so much. So there’s not some evil
increase its capacity with clients. Banks are trading more than
machine out there that’s lurking, waiting to gain
they did before with multiple exchanges and need more data
the system or pick up the footprint of an
quickly. As a result, there is huge uptake in the requirements to
institutional order to trade against. This last
telecom providers, not just for connectivity but for data centers
phase, it’s imminently reasonable to expect that
space. This includes co location which is providing some
market participants, either in concert or not, look
interesting challenges to the industry because the
at the market and say, “We’ve got to rationalize
requirements are growing fast with regulatory requirements
this” and look at crossing tools to reintroduce
like SOX, Basel II and OCC.
some order to the trading world.