As trading volumes rise inexorably, banks face a pressing need to develop trading platforms that meet demand. But is the quest for the all-singing, all-dancing trading system a folly doomed to end in costly failure? Dan Barnes surveys the scene.

The Holy Grail of a multi-asset, all-singing, all-dancing trading system is a myth. The desire to have such a thing led one bank to create a costly project that misread market trends. Now, smart banks realise that they need to pick and choose which asset classes to connect up. Not every asset class should be on the same platform, and banks should beware of technologists who want to create such a monster.

All the same, with trading volumes shooting up and increasingly rigorous customer demands for a single view on the market, it is essential that banks create platforms to meet these requirements.

So tough is the race to get ahead that return on investment is hardly an issue. “Measuring the return on investment wasn’t an issue; it was expensive but it was necessary,” says Patrice Blanc, chairman and CEO of Fimat Group, about his firm’s technology development project.

Volume growth

The background to all this is the spike in market volumes. This year, there was a massive growth in volume of electronic trading across certain asset classes. In May, the highest ever percentage of Chicago Mercantile Exchange’s trading volume ran via its online trading platform Globex. In the first six months of 2004, it noted an increase of 51.2% in equity, interest rate and, to a degree, foreign currency electronic trading compared with the same period in 2003. Chicago Board of Trade has also traded record volumes electronically (see graph below).

In the foreign exchange (FX) area, Lee Kidder, director of the wholesale banking practice at Tower Group, says: “The volume of online trading has just skyrocketed. I’ve seen a description of the FX market that said it was just like the stock market of the 1990s – like it was on a rollercoaster.” An important reason for this is the “advent of technology that made online trading much more efficient – online technology and its streamlining and efficiency”.

However, Mr Kidder says there is currently a limit to what can or cannot be traded electronically. “For the time being, [sophisticated] trades are going to be custom developed. They will be done by hand, by person-to-person contact, simply to make sure that they get done. Virtually everything else, it appears, is fair game to move online.”

Breeding ground

Amy Nauiokas, head of e-commerce at Barclays Capital, says that the commoditisation of products provides the perfect breeding ground for increased electronic commercial activity. “I think rising electronic trading volumes in all markets are a sign of natural progression. As markets mature to a level where customers expect and appreciate the faster execution and trading efficiency provided by electronic trading, they tend to move more and more of their volume to electronic platforms.

“We have seen that trend in the world’s most liquid fixed-income markets and we believe that trend will continue across asset classes, specifically in highly liquid markets like FX spot.”

Demand from the market

For banks and brokers, developments in electronic trading are taking the form of converging systems across asset classes. The reduction in the complexity of systems can facilitate easier analysis of data to establish total risk position, single viewpoints for and of customers, and ultimately lead to cost reductions. The prioritisation of these values varies according to the business. The term “multi-asset system” has different meanings for different people, depending on whether they are on the buy side, the sell side, or in the front or back office. Although single systems to support trading in all asset classes have been built (see The multi-asset dinosaur below), it seems that there is no longer demand for such a project.

Howard Pein, CEO of systems developer Codestreet, says: “Banks are moving toward more than one asset on a platform, but I don’t see anyone saying ‘we want equities, derivatives and other products on a platform’ – I just don’t hear that. People are realistic now; they understand that the equities division in a bank has a different agenda to the structured products division or the FX division.

“The question is this: what am I trading with my customers? There’s an aggregation of assets around the channel to the customer. The complexity of projects that technology groups can tackle these days has increased as a result of the evolution of software development. Where once it was a huge feat just to get electronic capture – you were doing that in Motif and Unix and C++ – just the fact that you were showing someone a screen and that they could choose their positions and their risk was a big deal. It’s now easier to write software. Java and .Net made software development remarkably more efficient,” he says.

The FIX protocol

Another technological development that has assisted in trading across asset classes by means of a single channel is the Financial Information eXchange (FIX) protocol. This messaging standard was specifically developed for the real-time electronic exchange of securities transactions. Banks are already exploiting its uses.

At Barclays Capital, Tom Zschach, head of client technology and equities IT, confirms this. “We have made a lot of progress on our FIX capabilities and, as a result, have seen aggressive adoption, especially in the hedge fund community. By leveraging a single industry standard, such as FIX, it simplifies the onboarding process for clients to trade equities, futures and options, FX and commodities,” he says.

Internal changes

However, many of the large banks must make extensive internal changes before they can start to address the systems change. Kevin Ashby, CEO at technology solution provider patsystems, says that the process is only just beginning in many major institutions. “In some of our customers, we have begun to see the business units being merged: in one we have seen equities and futures brought together, while in another we have seen futures and fixed income. The combinations are different and vary according to the part of the world you are in.”

But to get a serious advantage, serious progress has to be made, says Mr Ashby. “This is organisational convergence rather than technological convergence. You are seeing the organisational convergence first. Lehmans has announced some of these moves; Morgan Stanley has also announced some of these moves, whereby at a business level the equities and the derivatives come together under one organisational structure. But at the moment they have got separate systems. These are the first movements of the businesses coming together, with organisations getting to grips with what are the consequences of that,” he says.

Mr Blanc says that the length of time needed for this change led FIMAT to begin the process in 1999, when it realised that the derivatives market was destined to operate electronically. And measuring the return on investment was not an issue: it was expensive but necessary. Customer demand is for a multi-asset view from a single source.

“I consider [developing the systems] to be necessary – it’s the cost of doing business,” says Mr Blanc. “The drivers are mainly that the customer does not want to have multiple providers. If you put everything with one provider, and this one [provider] is going to look at your portfolio globally, analyse the risk globally and call the margin, analysing the value at risk for the portfolio, we will be able to offer a much better management of your resources in terms of capital. The customer is asking for this kind of service.”

Customer support

It seems that measuring complexity of systems is also often not a priority in comparison with supporting the customer. As Mr Zschach puts it: “Our metrics for [measuring success] are not the number of systems or the size of the pipes and plumbing. Our goal is to exceed client expectations and scale our business in a cost-effective way. The drivers are the ability to deliver reliability, performance and service to clients across a wide variety of products in a very consistent way.

“To build and manage the platform effectively, we have reduced the complexity that results in lower running cost. Our efficiencies are really around economies of scale and building a platform that we can scale with our customers that doesn’t add incremental cost,” he says.

For others, efficiency is a major driver, albeit not as an end in itself. It enables common factors between assets and systems to be exploited. Charles Marston, CEO at software provider Calypso, says: “In any institution in the existing environment, there are quite a complex number of systems. So saying ‘okay, we are going to get rid of these old systems and put in one multi-asset system’ is not really a feasible strategy.

“In investment banks, decisions are taken more locally for asset classes; for example, they might say ‘we need a new system for foreign exchange’ or ‘we need a new system for credit derivatives’. But those decisions are now informed not just by questions such as: are the candidates good at exchange or good at credit derivatives?. They give consideration to further questions such as: what else can they be used for? It plays that way into decision making for regulatory requirements,” says Mr Marston.

Asset management

The crucial factor for BNP Paribas is effective management of assets. “Traditionally, IT has delivered a silo-based approach, with each major business activity utilising dedicated platforms that generally fall short of the service required – whether as a result of inconsistent quality on product coverage or because of duplication of services such as multiple entry and maintenance of market parameters,” says Steve Gillen, CIO Fixed Income at BNP Paribas.

“The IT challenge today is to deliver a single platform that encompasses the best-of-breed for each asset class; for example, derivative traders having access to the real-time position service of the bonds desk, or credit derivatives utilising the interest rates curves from the swaps desk. It should also be able to respond quickly so as to incorporate the new functionality of each specific activity. This single platform is in reality a suite of services or components that can be marshalled according to the needs of each business activity,” he says.

“For the business activities within capital markets, there is an ever increasing dependency between the product classes of, on the one hand, structured products that have embedded forex, credit and interest rate products (hybrids) and, on the other hand, straightforward hedging.

“An example of this would be that both the credit and interest rate activity depend on similar hedging instruments. They all hedge with the standard products – for example, swaps hedging bonds, bonds hedging swaps, or futures hedging bonds. This creates a dependency on all these asset classes, even if they are not the primary traded product for the specific activity. So the trading desks all need a platform that brings all of the traded products together for risk management,” says Mr Gillen. THE MULTI-ASSET DINOSAUR Howard Pein explains how Codestreet built a ‘true’ cross-asset trading platform “[The development of the system] came on at the tail of internet era. In those days, the internet was everything; you had companies with no revenue and $30m valuations. The financial world was caught up with this. “The bank [that requested the system] had a pretty charismatic managing director at the time and he had told the bank that the world to come was all about the internet; in the future, its customers would want to trade with it via the browser, trading across the complete asset spectrum with live streaming prices. “They would also want to execute against firm pricing. That was the big-picture vision. The key to it all was the one-to-many model whereby the customers would all flock to the portal to trade everything. “We won the competitive bid to build the platform. There were two rationales to this: one was to have a rationalised infrastructure that was a cost issue; two, there was seen to be competitive advantage in having a rationalised platform. Your customers would see you as a seamless entity. “Moreover, there was the belief that it might provide opportunities for more complex investor trades that could be run as transactions. In providing those facilities, you would then have a double edge in that others would need to execute those trades separately. They had the true multi-asset vision, trading everything from equities to interest rate futures, to foreign exchange, all on the single platform. “The technology was delivered very successfully, but one thing that they got wrong was that the one-to-many model was not the dominant model that emerged. The exchange model became the accepted model. The single dealer portals are not the predominant trend in the market at all.’

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