Finding your competitive edge: The evolutionary pressure on the trading desk

It’s an oft-repeated truism that trading teams are always changing and evolving as market pressures, together with new technology, create new investment strategies on the buy-side and new ways for the sell-side to compete for execution services.

Consolidation and closure has been widespread as price pressure continues and models such as buy-side outsourced desks are increasing. Each change in the market, big or small, continues the evolution of the desk.

The value of data is increasing

Data has always been an important part of the trading desk, but in recent times our ability to collect, store and analyse data has increased exponentially, allowing a more granular understanding of what happens around a trade. Cheap storage and ultra high processing capability, that can be expanded as required using cloud services, gives firms at all levels access to computing power once reserved for only the deepest pockets. Now, much like my grandad’s garage, everything is stored, nothing thrown away, as it may be useful one day and provide an opportunity to fix a previously unforeseen problem.

However, having a garage full of old bits of wood doesn't mean you can make new high end furniture. For all this information to be useful it has to be clean, machine readable and stored in an organised way, a massive task in it’s own right. Once organised though, information on order books, positions, client flows, market price data and execution venue / quality can all help to reveal new insights into the trading process and order flows taking place. This can then feed back into the investment or trading process on both sides of the street in the form of pre and post trade analytics, trade ideas and algo evolution.

For obvious reasons firms seeking to make use of all this data are starting to favour computer science graduates over finance graduates in recent times. Traders are now programming using languages like Python to improve their execution services and streamline order flow. Risk needs to involve more than just internal order management data, it needs external inputs and new checks to keep up with the change. Indeed, with the move to a greater focus on remote working necessitated by COVID-19, there stands to be even more demands placed on systems.

The pressure is on the technology

As the business changes it ultimately puts pressure on the core trading platform. As the backbone of the trading floor, the OMS has historically not needed to cope with the need for these huge amounts of data. It’s traditionally been an outlet for data feeds, rather than an input, but this is changing. Aside from the usual market and reference data feeds increasing in number, new alternative sources of data are being used to add nuance and colour to traders views of the market.

Rather than an inflexible support for the business, the OMS needs to become more open and flexible than a traditional OMS. This isn't just in terms of a standard API to take information out, it’s allowing the client to truly customise their workflow and risk management processes, using their own data sets within the platform. It also means playing nicely with other systems on the desk by openly supporting interoperability tools via a flexible interface.

OMS systems should now be providing an open core infrastructure, whilst also incorporating scripting capability for the client. This flexibility will see firms evolve at different rates on the same systems whilst catering for different flavours of trading desk. It enables trading systems to be derived from the same root, but eventually evolve into something truly bespoke and unique. It’s here then, that trading firms of the future could find their competitive edge.

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