Trading Ingenuity: Low Latency and Beyond

The quest for low latency – speed – has been the name of the game in trading over the last decade, resulting, for example, in the increased demand for expensive co-location sites. But trading ingenuity today demands more than speed. While low latency remains a key factor, today’s smart trading firms have more complex goals. One is achieving deterministic low latency, i.e., speed that can be relied upon. But just as important, if not more, is the ability to access multiple venues, multiple asset classes and via multiple counterparties, with more effective risk management providing better use of capital.

Speed and Connectivity

In the past, speed and connectivity were ends in themselves that enabled circumstantial and opportunistic trading for a select group of market participants. Today however, these two factors have become essential components for a much wider set of activities, across both the buy side and the sell side. The global electronic trading landscape has become a much more complex ecosystem in the last few years, so trading ingenuity means knowing how to capitalize on this fast, global access in order to drive new areas of profitability, for example, by diversifying into new asset classes, venues, and geographies. Simply developing an incrementally superior new algorithm or gaining a marginal improvement in raw speed won’t cut it anymore, giving short-term gains at most.

From the sell-side perspective, the ingenuity is in the tools and services that banks and brokers are providing around that connectivity. This adds value for their clients on the buy side, who need to be able to quickly access new markets, for example. By allowing their clients to work with specialized solution providers and integrating tightly to view and control risk, they can reduce their cost of technology and provide greater capital efficiency to their clients.

Speed and connectivity are really just commodities. The value for firms today comes from working with solution partners that understand the sources of profit opportunities in the modern trading world, and can apply this speed and connectivity in a variety of circumstances, connecting clients to an ever broader array of opportunities.

Risk Management

Additionally, the market is moving toward tools that will give clients a global view of risk, with the ability to perform pre-trade risk analysis across assets. To achieve true margin and capital efficiency, firms need to be able to view their full exposure across multiple venues, counterparties, and asset classes in a single view.

Important to that process is a risk API to be able to receive real-time normalized information and then be able to programmatically make updates across market access infrastructure. Firms need to be able to change limits on one venue based upon exposure from another.

With analytics providing a good handle on events unfolding in multiple markets across the globe, firms need the ability to modify or set risk limits at appropriate levels to gain the greatest use of capital with the correct level of control.

So when the discussion is about low latency, remember that it is only one part of the equation. Trading ingenuity today is about a lot more than speed. Gaining and knowing what to do with these new capabilities around speed, connectivity, and normalized access is essential for a firm that wants to differentiate itself from the competition. Aided by APIs, these capabilities are on track to become the lifeblood of trading ingenuity today.