Complex Event Processing - It’s More Than Algo Trading
By Don DeLoach, President and CEO, Aleri
Part 3 of 4
[Don continues by outlining further capital markets applications for CEP]
Smart Order Routing/Best Execution/Compliance
Likewise, smart order routing requires similar knowledge. In fact, smart order routing really requires the exact knowledge, and simply adds additional complexity and processing logic in order to fulfill its particular requirements. We think this is an evolving market demand. Smart order routing is defined by many today in the context of understanding what the top of a book looks like on a per venue basis. As the market evolves to understanding market depth and the ability to reconstruct a virtual book, so to will the requirements for smart order routing evolve to contemplate the same information.
This also has compliance implications. Everyone in the US is now coming to terms with regNMS. There are several facets of this, but the Order Protection Rule carries the obligation to understand the markets as described above. Likewise, the Best Execution aspect of the new MiFID regime in the EU also places new requirements on how orders are routed to an execution venue. CEP provides a platform for rapidly implementing new order handling logic, along with facilities to capture data needed to monitor and demonstrate compliance with the new regulations.
What’s more, in addition to rapid implementation and deployment, it provides the benefit of implementing the routing rules in a high level framework where they can be quickly and easily modified as the markets evolve. We expect over time this, too, will evolve to represent a more complex interpretation of these requirements, either for pure compliance purposes or for strategic advantage, where best execution is defined and used as a differentiator for client attraction and retention.
Risk Analysis and Aggregation
As the volumes grow, and as the pace of trading increases at breakneck speed, the rate with which the market can change, and the potential magnitude of the change itself creates increased risk. A VaR calculation at a desk level for a specific asset class is no longer sufficient. With portable alpha strategies in place and multi-asset trading a reality, the crossover and interdependencies between disparate trading silos create linkages which must somehow be accommodated.
So we have, in effect, a two part problem. First, individual trading silos which used to analyze their risk on an end of day basis need the ability to understand that risk on an intraday basis. CEP provides a very suitable platform for enhancing silos in order to do a real time mark to market on a given trading portfolio. But the real value to the firm should come in the ability for CEP to further absorb real time P&L information and aggregate the silos in order to understand the linkages and aggregated exposure on a real time basis. Such a capability could well mean the difference between knowing you are headed for an explosion in time to correct your course, or understand the explosion has hit after the fact.
Trade Monitoring, Transaction Market Surveillance & Analysis
A very basic use is Transaction Monitoring. Large buy-side firms are forever interested in the cost of the transactions, and the ability to further monitor the effectiveness of trading operations. CEP provides a great toolset for this. And while there are many more examples, let’s look at just one more. CEP could be used by the risk and compliance department at the bank, and it might also be used by federal regulators or exchanges to apply surveillance to the market, looking for suspicious or inappropriate activity.
This technology is exceptionally well suited to detecting not only direct correlation of events, but can also be utilized for non-linear correlation which might otherwise remain undetectable. As the level of sophistication goes up with those circumventing the rules, so too must the level rise with those enforcing them. An interesting discussion going on right now involves the practice of toxic liquidity, where prop traders send sniffer orders into dark pools of liquidity to try to understand the institutional blocks in play, then engage in arbitrage based on this information. There is growing concern around this practice, and CEP, again, provides a nice platform for addressing this.
[To be continued - in conclusion next week, a look at applications CEP applications beyond capital markets]
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