Technology plays a significant role in the capital and commodity
market, in fact trading firms are the first ones to leverage any
cutting-edge technology that can help to get the pulse of the
markets faster, help them “execute trades” faster, or
measure their risks faster.
In the last two decades we have seen several innovations in the
industry in terms of new financial products and new ways of doing
business, all of which require substantial application of very
advanced technologies. Whether it is complex analytical algorithms
to predict future movements and perform valuations of complex
products, or connectivity to exchanges, technology has been at the
forefront of capital and commodities market development.
Faster and more efficient technology in this business can lead to
better financial results. The line between technology and business
functions has become extremely blurred. For instance, better
trading strategy algorithms leads to better trading decisions. The
key challenge for technologists in this space is to keep pace both
with technology and rapidly evolving products and regulations.
As a result, it is important to understand the technology trends
in this space. These trends are a result of the regulatory changes,
innovation in technology and budget pressures. Let us look at each
of these trends in detail.
Technology required to cater to regulatory
requirements
In reaction to the global financial crisis, most governments are
bringing massive regulatory changes, like Dodd-Frank Act in USA and
Basel III in OECD countries. The new regulatory regime, at some
level, would bring fundamental changes to the way business is done
in the capital and commodities markets.
These multiple regulations are also bringing in several significant
technology changes like massive reporting requirements,
requirements around connectivity and integration with new entities
like SEF (swap exchange facilities) and SDR (swap data
repositories); moving from end of day risk management to more
proactive and near real time risk management. With swaps being
cleared though CCPs; ccollateral management will become an
increasingly important aspect for investment managers and hedge
funds. The collateral management systems will be needed to
verify/manage the collateral calls from clearing brokers.
Reporting of transactions executed by SEFs will be handled by the
SEFs. However, for unlisted transactions reporting will have to be
handled by one of the parties (major swap participant or dealer).
What to report for what trade will have to be built within the
applications supporting trade execution.
These regulatory changes are coming with very tight regulatory
timelines and in some cases evolving requirements. These regulatory
challenges bring to the fore technologies like process grids,
elastic application containers, complex event processing, in-memory
databases and real time databases.
Application of mobile solutions
Banks are extending their products and services on smart devices
for the retail investors. To begin with banks would provide mobile
versions of their website that will allow common transactions
through mobile devices. As smartphone usage increases and data
connectivity speed improves we will see dedicated mobile apps from
banks. That is not all, powerful personal finance, account
management and modeling apps would become available.
On the wholesale front another related trend is the use of tablet
(iPad) based applications in the capital markets industry. Research
reports and research tools (time series analyzers, analytical
calculators etc) being provided to the clients on iPad would
substantially improve productivity and decision making. Key
decision makers like Portfolio Managers are always on the road
evaluating companies and negotiating deals. Providing powerful data
visualization tools along with current information like research
reports has the potential of significantly improving decision
making.
In addition, Sales teams of Capital Market players have started
using such mobile applications for institutional clients. Banks
offering wealth management services are looking at providing real
time portfolio management on iPad to their HNI clients.
Adoption of cloud
Cloud Computing is a promising paradigm for delivering computing
utilities as services. Just as personal computers and servers shook
up the world of mainframes and mini computers, or as smartphones
and tablets revolutionized the mobile commerce industry, cloud
computing is bringing similar far-reaching changes to the licensing
and provisioning of infrastructure and to methodologies for
application development, deployment and delivery. There are
countless opportunities for financial services firms to leverage
the benefits of cloud computing by migrating a variety of
applications to the cloud.. Although very few firms are currently
using cloud computing for their core trading applications,
different hosting architectures provided by IaaS cloud providers,
private clouds and hybrid cloud space, will drive more firms to
move their core applications to the cloud.
Given the current business environment and global economic
conditions many firms will be forced into evaluating the capital
expenditure required for building data centers and maintaining
server farms. As a result of this, even the core applications will
be hosted on outsourced infrastructure available on cloud. In fact,
core solutions, such as batch processes running throughout the day,
analytics and reporting applications, are perfect candidates.
Growing power of social media
There are innovative trends that are emerging in terms of
applicability and impact of social media on this industry with
respect to predicting stock prices and using social media for
retail trading. In the near future, more retail brokers would be
offering social media based trading platforms to their clients on
which the clients can collaborate and trade effectively. Predicting
stock prices based on inputs in the form of sentiment from social
media is a promising area for research. Initial research
shows encouraging results. However, final verdict on this is not
out as yet, so for now there are no right or wrong answers.
However, with the right level of investment, accuracy of output can
be enhanced and more importantly confirmed. Social media is finding
a real applicability amongst the retail investors who are quite
open to sharing trading tips on social networks such as
currensee.com etc
Advanced risk technology
With the 2008 global market crash and recession, risk management
as a discipline has come to the forefront in trading firms. This is
becoming even more critical with regulators bringing lot of focus
back into risk management and expecting significant rigour and data
reporting responsibilities.
Traditionally, a trading firm has been siloed across different
asset class based trading desks, where each trading desk having its
own profit and loss responsibility. However trading firms are
looking to get a better handle of credit risk (exposure against
counterparties) and market risk across the organization in a more
timely manner. This is leading to significant investment in data
consolidation, valuation and analytics on large data. Several
technologies like process grid, in-memory databases and data grids
are being used to build near real-time risk calculation engines,
that not just focus on one trading desk but helps understand
exposure across organization.
Era of Big Data
Another big
trend being noticed is the renewed focus on managing operational
risks, for example management of trader limits or prevention of
insider trading. This is a huge challenge for a trading firm, as
they would like to maintain trading and decision making agility to
capture market opportunities without losing the ability to comply
with laid down policies and practices. Some of the approaches that
are being implemented deals with big data analysis technology and
semantic based data management technologies. A typical capital
market firm generates hundreds of gigabytes of data on a daily
basis. Analyzing such massive amount of data to understand trading
patterns to identify insider trading is still a very nascent but a
promising technology. Similarly using semantic based data
management is another upcoming field that is gathering lots of
attention.
To summarize, technology adoption in capital markets is at a very
critical juncture in both developed and emerging markets. Keeping
pace with these trends will be very challenging for banks and
trading technology vendors.
The key challenge for CIOs is to support regulatory requirements
through technology and at the same time allocate technology budget
for launching new products or new markets. In addition the pace of
technology advancement is making it difficult for the CIOs of banks
and technology leaders to plan a long term roadmap for IT.
- Abhishek Bhattacharya is Director- Technology while Pravin
Lal is Director at Sapient Global Markets