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WHY SPEED ALONE IS NO LONGER ENOUGH

24/01/2019

By Terence Chabe, Business Development Manager, Colt Capital Markets

 

The dwindling game of improving speeds

Increasing the speed of trading has long been an obsession for capital market firms. To put it bluntly, the faster the rate a firm runs at equates to more potentially completed trades. Looking back in the capital markets, firms favoured traders who were physically quick on the phone, and this notion is replicated today with firms who speed up trading systems to gain a competitive advantage over rivals.

This pursuit of speed in modern times has seen substantial investments made into state-of-the-art low latency infrastructure. This infrastructure has become so advanced, in fact, that latency speeds are continuing to grow closer to as fast as physically possible, with some systems now completing trades in milliseconds.

Speed has been, and always will be, important in the capital markets. Increasingly though, being fast is becoming less and less of a competitive differentiator for firms and more of a general expectation of any modern market player. The competitive advantages speed once offered are increasingly instead being offered by a new pursuit of smart technologies.

Terence Chabe, Business Development Manager, Colt Capital Markets

Today’s market is centred around market data and intelligence, this means embracing modern technologies will be a key part of being a successful market player going forward. Cloud computing, artificial intelligence (AI) and machine learning solutions are all offering market participants the chance to infer new meaning from data and automate decisions in ways smarter than ever before. It’s an opportunity that no firm should be missing.

 

Harnessing the true potential of big data

A year on from the MiFID II regulation coming into effect and data has never been as big of a topic in the capital markets. Firms must now produce, and then store, huge amounts of data to comply with the new regulatory standards. Some have bemoaned this fact, but more sharp players have seen the value in utilizing this vast amount of data. This isn’t to say that MiFID II compliance has made more data available, the data has been there for years, but previous analytics weren’t able to properly handle and analyse it. AI solutions have changed this and can do more with data than ever possible before.

AI solutions can be utilised today to provide advanced macro research, analysing thousands of securities in real time to provide insights into the value and risk of a stock, as well to make recommendations on overall investment strategies. This an example of an AI solution augmenting the actual intelligence of traders. As well augmenting intelligence, AI can also augment a trader’s overall decision making. Products with Analytics-as-a-service features helps traders have a strong grasp on the data they’re using, with tick data and alternative data sets pulled out to give traders the hard statistics needed to base improved decision making upon.

It’s also worth noting that AI solutions can potentially be very cost effective for firms. Before, firms were forced to pay quantitative analysts to examine data in a manual way. AI technologies are increasingly displaying that they can disrupt this traditional reliance on expensive human analysts through providing a cheaper, faster and automated service.

 

Lessons to be learnt from other sectors

AI solutions and products are already fairly established in the capital markets and should grow more and more popular in adoption. For the savviest of firms in the market, who really want to embrace smart technologies, an examination of how cutting-edge technologies are being used within other sectors is in order.

In the retail sector, chat bots have been implemented by businesses to help improve both customer experience and the overall digital experience offered. Chat bots are becoming so advanced that some retailers are now implementing them on social media channels, where bots can have instant messaging conversations with customers in seamless real time.

As chatbots grow in prominence in other sectors, it will become difficult for those in capital markets to ignore the benefits that they can bring. Just imagine how a chatbot could transform the trading process, with an automated agent one day potentially being able to complete a trade for a buyer without the need for a human trader at all. In this context, it’s evident that chatbots have the potential to totally transform how trading is done in the capital markets, this is something that should be on the radar of every firm.

 

Changing before its too late

The pursuit of continuingly improved speeds in the capital markets has become a very deep-rooted fixation, and that’s understandable. Speed will always be important, but for firms to truly gain a competitive advantage today high latency speeds must be partnered with technologies that are increasingly showing their potential to transform the capital markets.

This coupling of low latency speeds and new technologies will be the blueprint of success for capital market players going forward, those firms that choose to ignore the huge potential of AI and machine learning do so at their own risk.

 

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Finance Derivative is a global financial and business analysis magazine, published by FM.Publishing. It is a yearly print and online magazine providing broad coverage and analysis of the financial industry, international business and the global economy.