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Xenomorph’s thoughts on Algorithmic Trading

Chris Budgen, Chief Technical Architect, Xenomorph

Algorithmic Trading and "the battle of the machines" is certainly a hot topic at the moment - what are your thoughts on this?

It’s an interesting time and there’s certainly a lot of market noise around algo’ trading at the moment - low latency, dark pools, stealth algorithms are the buzzwords of the day and I’m sure there will be many more to come over the coming years!

The market seems awash with new technology products claiming to offer the very lowest of latency solutions and the most efficient trading algorithms. The introduction of regulations such as MiFID are also forcing organisations to review their technology needs at a core level and algo’ trading seems to be just one of those technology segments that’s in vogue at the moment.

Essentially, we are in the process of a massive technology paradigm shift and it’s clear that financial institutions have realised that they have to seek outside assistance from technology vendors in order to remain competitive. It’s also clear that there is no single technology product out there that will be able to meet the full set of market demands being placed upon financial institutions. The technology vendors are going to have to gear up and cooperate to deliver solutions that can meet those demands.

How are Xenomorph positioned within this current feeding frenzy of vendor activity?

TimeScape, our real-time analytics and data management platform, already offers support for any type of instrument which makes it ideally suited to back-test strategies across multiple asset types. In fact, many of our clients have been using it for years to do just that, by taking advantage of the flexible data model and in-built support for high performance and sophisticated time-series analysis. Also, because we can easily hold data from multiple data vendors side-by-side, organisations are able to run back-testing data on data that can be verified and scrubbed before they do so. This is clearly very important as it’s an obvious case of bad data in = bad decisions out = there’s the door.

In addition, our recent introduction of intra-day tick capture, along with full instrument terms and conditions and daily data, means that we now have a unique offering that can support all aspects of the financial data silo requirement within a single, unified data framework. This is an essential foundation for all aspects of financial data management, not just those needed to support algo’ trading.

Consequently, I think that as the algo’ trading market matures to involve more complex instrument types and cross-asset strategies, then we will find ourselves increasingly well positioned to support those needs. It’s my belief that the algo’ trading vendors will be forced to out-source to best-of-breed systems that can already handle key aspects of the financial data and modelling needed to support them – they simply won’t have the time to do that themselves if they are to remain competitive. That can only be a great opportunity for Xenomorph!

This is illustrated by some of the work we are already doing with our technology partners in this space. For example, 4th story (http://www.4thstory.com/) are building advanced algo/back-testing solutions based on TimeScape as their underlying time-series financial data platform.  We are also undergoing similar partnerships with various model vendors (e.g. Numerix) and data vendors (e.g. Spryware, Tenfore) so that we can provide a wider range of out-of-the-box choice to our clients. Clients demand best-of-breed solutions and that can only happen by uniting best-of-breed technology vendors together. TimeScape has been designed from the outset as this vendor bridge and we see this as an area of great development activity over the coming years.

How do you see the Algorithmic Trading market evolving and what I.T. challenges do you see ahead?

Despite the scale of the technological shift we are observing today, I think we’re only now just touching the surface of what lies ahead. The market will drive organisations towards a new wave of technology that will require ever-increasing volumes of data and analytic sophistication. Many of the current algo’ vendors will have to move quickly to stay ahead of their competition and it’ll be interesting to see which ones come out strongest. As I mentioned before, I think the algo’ vendors will have to form collaborations with other technology vendors to survive. They’ll need to do this to support greater numbers of asset class in business areas that will require expertise that simply are not their core competency. We’re already seeing this with a number of vendors in the streaming and RDMS space, but I think this is only the start of that process. It’s undeniable that collaboration is the way forward.

What about Risk Management in all of this?

I think Risk Management will be forced to respond to these market drivers and that the Risk Management function, and that of algorithmic trading, will need to converge to support the business and regulatory demands that will be introduced.

At the moment the Risk Management function seems to be being slightly forgotten, under the cloud of the algo’ frenzy, but I strongly believe that this will be the next pressure point that may well influence technology spend once the algo trading function stabilises and the regulators start to apply their attention to it.

I also believe that the academics will need to do some serious research to understand how algo-trading affects the dynamics of the traditional market model, so that that understanding can be fed back and applied to the risk management and back-testing function.

What about the big Data Vendor players, how do you think they will be affected?

There’s no doubt that the big data vendors are going to face stiffer competition from the smaller niche players. The combination of low latency exchange feed handler products and the new breed of companies developing sophisticated trading tools may well mean that their front-office products will become less critical to the business.

The demand for low latency means that the data feeds they provide may be too heavy for many algo purposes, and so the traditional need for their use as fundamental data silos may dwindle as companies are forced to bypass them to achieve the response times they require. Either they’ll have to change their act or they’ll start looking to buy-up these new niche players to maintain their market position

What do think will be the key vendor technology drivers in the future?

I think this can be summed up in four areas:

• Speed
• Scalability
• Flexibility
• Interoperability.

The first three are self-explanatory, but the interoperability angle is all about making it easy for technology vendor products to interface together. Clients demand best-of-breed solutions and I think that this will necessitate increased collaboration and the emergence of standards to enable greater business function interoperability between offerings in the technology stack.

What plans have Xenomorph got to support algo trading?

We’re have no current intention of moving into the execution management area, as we believe it’s far better to work with our partners allowing all to focus on their core competencies. Rather, we believe that we are uniquely positioned to handle the supporting data management and data analysis needed to support that function.

To support this, we are currently enhancing a number of key technology components that will allow our partners to deliver even greater solutions to the market. Work in progress currently includes:

• Clustering - this is focussed on distributed database and calculation virtualisation across grids;
• Active Queries - real-time "watch queries" based on any configured analytic or pricing model across an entire instrument universe set;
• TimeScape QL Simulation and Back-testing - we are making core enhancements to our TimeScape QL query language that will make it easy to perform highly sophisticated historical analysis of market factors and trading strategies.

It’s an exciting time and one that will present challenges to all involved. We at Xenomorph are looking forward to that challenge and to releasing the next wave of products to allow our partners and clients to succeed in what is a highly competitive and groundbreaking market.

Chris Budgen, Chief Technical Architect, Xenomorph

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