The Financial Applications Hub: A high-performance app store for markets
Tue, 23 Feb 2016 10:41:15 GMT
In this article, Mike O’Hara and Adam Cox of The Realization Group learn about a new initiative, one designed to help financial firms address an increasingly complex set of decision-making and development needs while at the same time allowing app builders and content providers to develop and market their offerings more effectively. The financial applications hub is designed to offer data, software, tools and other content in one place, enabling financial firms to deal efficiently with a host of challenges, from regulatory demands, which may require immediate attention, to the longer-term competitive pressures that are altering the face of the industry.
Mike and Adam speak with Rob Bath, VP of Global Solutions at Digital Realty, the company driving the initiative, along with Frank Piasecki, Co-Founder of Activ Financial Systems, Kris Peterson, CTO of AlgoSpan, Robin Mess, Chief Strategist at big xyt and Jo Moore, Managing Partner at Optimus 5. Together, these experts describe a confluence of factors that are making the apps hub concept an attractive proposition for a generation of technologists who are finding they need to do more with less. For app developers and other providers, the hub lets them become part of a growing community focused on Big Data, cloud technology and Software as a Service (SaaS). For buy-side firms, it means they can leverage and take full advantage of the new products that the community is building.
From an IT and operations perspective, financial firms are under enormous pressure. On the one hand, they need to satisfy a widening array of regulatory requirements, many of which involve new apps, specialist skills and growing volumes of data. On the other hand, just staying competitive and keeping their core businesses running mean they need to constantly upgrade systems, moving from a cap-ex to op-ex model, bringing in state-of-theart technology and introducing different ways of doing business. The largest firms may be in a position to employ sizeable teams of IT professionals to keep up with the increasingly long and complicated list of tech- and data-oriented demands. But for most companies, particularly on the buy side, this is simply not commercially viable. They need their IT teams to be able to use the latest technology and import as much already-available data as possible. Reinventing the wheel is not an option.
Whatever the function - be it algo testing, data usage or transaction reporting - new apps are constantly being developed that can help financial companies improve their performance and operational efficiency. But companies don’t always know about these apps, while their developers need a way to reach potential clients. By bringing content, tools and software together into one place, the hub can cut down on the time and effort spent sourcing solutions, while at the same time provide firms with greater visibility of technology choices at their disposal.
Put another way, what the market has been lacking is its own marketplace, one where what’s bought and sold is technology, data and expertise. The advent of the cloud and business models such as SaaS has allowed such a centralised marketplace to take form.
All of this in turn means that app developers, software vendors and data providers can leverage what the community is developing and at the same time utilise a new and more efficient method of distribution.
“ There are a whole myriad of application areas that can be effectively cherry picked from the store to address particular challenges such as compliance, surveillance, risk analytics and other issues that these firms need to address.”
Rob Bath, VP of Global Solutions at Digital Realty
Apps on demand
The phrase ‘one stop shop’ has been around since at least the 1930s. For busy people with diverse needs it offers speed, convenience and efficiency. Can what is essentially a retail concept be exported to the rarefied world of financial trading technology?
Rob Bath, VP of Global Solutions at Digital Realty believes it can.
“In essence, what it really aims to achieve is to create a centralised location where compliance, test and big data storage for capital markets firms is a viable proposition,” Bath says. “There are a whole myriad of application areas that can be effectively cherry picked from the store to address particular challenges such as compliance, surveillance, risk analytics and other issues that these firms need to address.”
Companies that are undergoing what Bath called “their transformation journey” can of course still maintain proprietary platforms and systems. But he expects firms will become increasingly comfortable with outsourcing more of their technological and content needs. The hub aims to help them boost their comfort levels by bringing together content and tools. “The goal is to maximise the respective inputs and ingestion of data sources from a whole raft of different data vendors. That data may be historic, reference, real time market data, sentiment or other.”
That is all then channelled into a central repository and sits on a smart storage platform that enables accelerated retrieval and replay of data. The platform could support anything from the ability for regulators to interrogate market activity, to firms leveraging data history to enable back testing of algorithms and the design of those algorithms, as well as more real-time pretrade risk analytics applications.
“The costs of interacting within and across the financial community have exploded, as the amount and complexity of data continues to increase. As such, there is a real requirement to manage both static and real time information in such a way as this trend does not overwhelm firms already rapidly adopting to new regulatory regimes,” says Frank Piasecki, Co-Founder of Activ Financial Systems.
“Consider, for instance, listed options. There are more than a dozen registered exchanges in the United States alone. Data from OPRA (Options Price Reporting Authority) and the SIP (Securities Information Processor) requires some 40 GB of connectivity and a message rate of up to 12 million messages per second. Just imagine what that means. That’s a compute problem,” he says.
Big data is about interacting not only with lots of data, but also with lots of updates to data. Crucially, it is about dealing with the most relevant data within this rising tide. Financial communities want to see depth inside the markets that they’re trading, which creates a new layer of cost. So as participants seek to understand far more than just the top of book and perform relevant analytics, they want ways to do so without processing all of the data.
In that sense, it is understandable that Bath sees the hub’s ability to inject speed into development as such an alluring quality. “The key thing here is enabling these firms to accelerate their transformation objectives, and the ability for them to seamlessly interface and interconnect with the other participants on the platform.”
Global banks continue to struggle with the ever increasing demands of regulators and the negative impact of the cost of compliance on bottom line results. Since 2007 return on equity in the industry has fallen by almost 50% and post crisis regulation has played a large part in this, according to Jo Moore, Managing Partner at Optimus 5, a consultancy firm specialising in regulation in the banking and financial markets sector.
“ There is a little understood element of the cost of interacting with the financial community, which is that the amount of data and the complexity of data have exploded. So there’s a real requirement to manage information so that it doesn’t overwhelm.”
Frank Piasecki, Co-Founder of Activ Financial Systems
“Banks have responded by restructuring and cost-cutting initiatives, but they still feel the pressure to do more with less whilst absorbing the additional regulatory demands within their existing infrastructure and resources”, says Moore.
Crucially, Moore sees the trend for increased regulation only continuing, as we move from an acute reaction to the financial crisis into a more macro prudential phase.
Any firm that is not building its own solutions - a huge chunk of the market - will need to be able to tap into solutions that have already been developed, as well as the data and expertise that those solutions-builders are offering.
Meanwhile, MiFID II and other regulatory measures being implemented are changing the very nature of compliance. Piasecki says that in data terms, they are actually turning every consumer into a publisher by fiat.
“Everyone has to prove what they knew at the time, and that they handled their orders or their responsibilities to the market in an appropriate fashion. As such, we are going to create a massive need for capturing the activity of the investor or trader and the firm and their counterparties in a way that makes a sense,” he says.
“ Banks have responded by restructuring and costcutting initiatives, but they still feel the pressure to do more with less whilst absorbing the additional regulatory demands within their existing infrastructure and resources.”
Jo Moore, Managing Partner at Optimus 5
Kris Peterson, CTO of AlgoSpan, says that as trading comes under greater scrutiny, the interrogation of data will need to become more precise. Which orders were placed at which times and which were visible all become crucial questions for algo developers and regulators alike.
The transition to the new regulatory requirements will involve a substantial amount of infrastructure-related work, which Piasecki says will become more latency sensitive over time. Firms will also need to move beyond the relative simplicity of the current workflows in order to enable big data storage and retrieval platforms.
MiFID II for instance has an expanded list of financial instruments which, from the perspective of monitoring and data storage, will translate into significant amounts of data. At the same time, the regulation will widen the definition of execution venues, creating greater needs for trade capture and reporting. Timing as a service will also take on greater importance. Orders and transactions will need to be traceable and satisfy maximum permissible divergence limits to Coordinated Universal Time, or UTC, in line with the direction regulation is taking.
What’s more, it is not simply about the quantity of data or even the reporting of it. The requirement for firms to demonstrate best execution, effectively on demand, is a big driver, and that will require rapid retrieval of whatever gets stored.
“We have a big data problem, not just in terms of the quantum of storage, but also: what is the frequency with which we have to pull this data or action against it?” Bath says.
“ Regulators asking questions about what happened during one millionth of a second or another will open up a new market of people who are relatively new to replaying and testing high precision data, because they haven’t had to do it before. Now they will.”
Kris Peterson, CTO of AlgoSpan
More information, less capital
Addressing regulatory requirements is only one of three categories that Piasecki has identified with respect to market data and trade requirements.
The first is time-series data. Here, latency can become an important factor but not exclusively so; for instance, data required for back-testing is not necessarily affected by latency. A second level of interaction with market activity is analytics on real-time data. And the third level is the regulatory requirement.
“The first tier is interacting with the market at latent-appropriate levels. The secondary requirements are around the analytics against that data; behavioural data, time-series data, back-testing functions, all of that. The third is the regulatory world,” he says.
While this third category has grabbed many of the headlines, the first two are also having a major impact on financial firms and their development needs.
“We are not talking only about big data,” says Robin Mess, Chief Strategist at data and analytics vendor big xyt. “Today analytics in the financial sector is not only about security prices and large datasets, it is also about new data, for example sentiments derived from Twitter feeds or from Google searches or whatever. There are new offerings every week.”
A factor driving data growth, Mess notes, is the degree to which so much trading has become automated, which means systems are generating more information.
As a result, they need more data, both to ensure a firm’s algorithms will perform as expected and to be in a position to satisfy regulatory requirements. AlgoSpan, for instance, offers a historical data product that can be used in testing as if it were being used in real time, down to the microsecond.
Peterson says the market for such data and related applications up to now has been relatively opaque. But the demand is there and is only likely to increase, particularly as regulators begin asking questions about what happened during one millionth of a second or another. “That I think will open up a new market of people who are relatively new to high precision data, replaying and testing because they haven’t had to do it before. Now they will,” he says. At the same time, the industry has been undergoing huge changes since the global financial crisis. Prior to 2008, the capital markets had the luxury of making large profits due to the high margins the industry enjoyed.
“The landscape has significantly changed since 2008. It is significantly more competitive today and it will definitely be more competitive in the future,” Mess says.
The response to that increased competition, according to Moore of Optimus 5, cannot 4 come simply from cost reductions. “Conventional cost-cutting methods are not sustainable and banks now need to think differently about how they can respond to these regulatory challenges. As a result, the utility model is becoming increasingly attractive as an alternative approach to delivering results and achieving cost savings,” she says.
“ There are more and more participants that are thinking about freeing up internal resources for their core business and relying on experts when it comes to data processing and analytics.”
Robin Mess, CEO at big xyt
A growing web of connections
Digital Realty sees the financial apps hub as being more than just a place providing access to the latest technology and content. It is both a marketplace and a forum, where firms can gain access to specialist services and expertise to meet their trading and compliance needs and where vendors and developers can build on each other’s work to create new solutions and connect with other industry participants.
“Obviously, that has performance benefits, if we make it analogous to supporting the development of trading algorithms and trade strategy. The ability to accelerate an Integrated Development Environment has a direct influence on a firm’s competitive advantage since products and services can be brought to market more quickly. The breadth and depth of the data stores coupled with the speed of interacting with that data is key to how quickly you’re able to build and realise an edge in the market,” says Bath.
But it is not only about performance. There is a clear commercial benefit from using a service such as an applications hub instead of doing so much of the work in-house.
“Institutions no longer have the capacity to invest heavily in the systems, hardware and resources required to meet the ever-increasing regulatory requirements,” Jo Moore says. “The financial services industry is now reaching the point where firms can no longer ignore the benefits that a mutualised utility model offers, if they wish to remain competitive and relevant in the future.”
Those commercial pressures, which are exacerbated by all the additional technology processing and content management responsibility, are forcing firms to consider the implications for their business models.
Piasecki says: “Often there is less money to sustain internal IT infrastructures and less money to pay people to manage custom development infrastructure or applications. That means they’re looking to vendors to provide appropriate outsourcing solutions.”
There is yet another benefit that can come from the hub’s plan to act as a forum, one which is less talked about but still vital: the very cost of plugging into communities can become prohibitive because the counterparty list is growing so swiftly. Piasecki says people are connecting to more points across the world because they’re trading globally. They have more counterparties, whether those are customers connecting via the web or collocated in facilities.
He calls this a “connectedness explosion” and it has made smart deployment and integration into communities crucial.
Focusing on core strengths
As markets and technology have grown in tandem, trading firms have taken on many new functions. They don’t fit into the neat boxes they once did. That in turn is pushing them to try to eliminate operations that don’t fit with their core strengths.
“I would say that there’s a crushing of functions in the industry where data providers are becoming facilitators of more and more functions around the trade, and actual brokerages and banks that perform functions are expanding into more information services,” Piasecki says.
“People want their back-end out of the organisation; they want to focus on what they do well. 5 In a bank’s case, that means: service the customer and maybe control and design and enrich and invest in the customer experience. But they certainly don’t need to be running market data ticker plants. That’s really a very old-fashioned concept.”
Mess noted that companies in the past, both on the buy-side and the sell-side, were building their own data warehouses internally. That involved hiring the right talent, buying hardware, buying and developing software and a host of other activities to handle all the data processing and storage. On top of that, they had to develop analytics capabilities to make sense of the data they had been collecting.
Mess says it will be highly beneficial for the financial community if data processing and analytics is handled by specialists who have expertise in how to combine hardware, software, data centre capacity, data sources and value-added analytics.
“There are more and more participants that are thinking about exactly this kind of transition to free up internal resources for their core business and rely on experts when it comes to data processing and analytics,” Mess says. He adds that the apps hub can play this role by bringing content and service providers together.
Old role, new needs
While the work that the hub will facilitate is entirely new, the role it will play is actually very old. “The idea of a financial hub is an ancient one,” notes Piasecki of Activ. “Market places themselves are a transfer of information. It’s just that in olden days that was done at convenient places where the nexus of physical transformation occurred; port cities or major capital cities or crossroads.”
And just as one of those port cities or crossroads of “olden days” made life manageable for people, so is the financial apps hub expected to meet an acute need in a world that has become so dizzyingly complex.
To do that, the hub should feature both commercial products and open source. Bath says the goal is to build something that will be informed generally by challenges such as impending regulatory compliance objectives, and specifically by what acts as a competitive advantage for firms.
The solutions and content providers that will feed into the hub are expected to be directed by what the users want and need. Firms will be able to define their competitive advantages within the context of products and services increasingly delivered by an outsource partner.
Another critical feature is that hub participants will have access to more than just apps and data: they will have access to the community. Consultant services and expertise are as much a part of the hub concept as the underlying content and technology. This is vital because the regulatory or commercial usages are often highly complex. People need access not only to the data and apps but also to the people behind them.
“I think much of who represents a potential a participant/partner within this hub is informed by what the community drives for. The buy and sell side, and the exchange community – what are their particular pain points and priorities, and how does that inform who contributes building blocks to the platform?” Bath says.
In this sense, the hub represents both a centralisation and democratisation of technology consumption. In other words, just as financial markets provide an essential meeting place for buyers and sellers of assets and derivatives, the hub aims to perform a similar function for the market itself.
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