In this week’s blog, Chris Skinner, one of the leading bloggers in the European Financial Services Sector makes a very strong case stating that in order for banks to remain competitive in the rapidly evolving financial markets, they need to ensure that they take full advantage of the latest advances in trading technology, especially in the area of low latency.

“In capital markets, where algorithmic trading analytics can make the difference between success and failure, technology is critical to competitiveness. If you cannot compete with another bank’s new derivatives capabilities, which are driven by technical excellence, you might as well give up the ghost. If you lose a millisecond of speed in the investment markets, you are dead. That is why low latency is at the core of capital markets today and technology strategy is at the core of latency. This is why an exchange said to me, “If it takes more than 500 milliseconds to process then it is of no value because it is out-of-date”. Technology strategy is the core focal point for the exchange. This is why an investment firm said to me, “We moved servers to Moscow because it takes 60 milliseconds to route a trade from London to Tokyo via Moscow compared to 240 milliseconds if we process the trade via New York”. Technology strategy is the core focal point for the bank. This is why investment firms are co-locating their servers within exchanges. It is also why we are seeing market blips occurring on a regular basis, because markets move in real-time.In capital markets, technology strategy is at the core of business strategy.” http://www.finextra.com/community/blogs.aspx?mem_id=29084

Chris is absolutely right, however there are additional dimensions that need to be taken in to account when banks look to establish and maintain competitive advantage through the use of technology.

Yes it’s true that once you’ve decided to trade, you want to execute the trade with minimal delay to avoid it being “out-of-date”. However, now that the markets are becoming more and more fragmented and trading decisions are becoming more complex, then not only do you want to get the execution right, you also want to get the when, how, and why right with the same speed and focus.

• For the “when” you could use the latest trade signal generation algorithms that combine indicators such as sentiment, momentum, volatility, liquidity, trade activity and other measures to provide market entry timing points for your trades.
• For the “where” you could use visible and dark pool analysis tools to identify the trading venues that are most likely to enable you to meet your “probability of execution” objectives.
• For the “why” you could use real-time analysis tools that enable you to more fully assess the ebbs and flows of the market to identify trading opportunities and risk.

The markets are becoming more and more complex as they continue to fragment and evolve and technology is the key to keeping ahead of the competition.  But just a word of caution – bad decisions made quickly are still bad decisions.

Tags: Algo Trading, best execution, Dark Pools, Latency, low latency, MiFID, risk

This entry was posted on Monday, March 17th, 2008 at 12:50 pm and is filed under Aleri CEP Blog . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.