From The Trade, October 24:
In celebration of The TRADE’s twentieth birthday, editor Annabel Smith rounds up the 20 greatest trading innovations of the last few decades, exploring the solutions that have overhauled and reimagined the processes that traders depend on day in and day out to execute in the markets
- Order and/or execution management systems (OEMS)
Kicking off this whistle-stop summary as the number one most impactful innovation in the industry is the order and/or execution management system (OEMS) – the beating heart of trading desks around the world. Brought to market in the early 2000s, the sometimes combined and sometimes separated systems were designed to enhance the previously manual processes associated with managing and executing orders. They offer a nifty alternative to the previous plethora of both written records and later, excel spreadsheets that traders were previously forced to grapple with each day to keep things in order.
These systems touch upon all elements of the trading lifecycle throughout the front-to-middle-to-back-office including execution, order, risk and portfolio management. Traders’ order blotters sit within these systems and trading teams use these systems to consolidate data sources and research in one place to increase efficiency and speed when going about day-to-day activities. They also use them to access the market, connecting directly to counterparties to access liquidity. An EMS overlays an OMS by enhancing connectivity, aggregating data and being more flexible as it solely pertains to execution needs.
- Bloomberg Terminal
Up next and needing little introduction is the Bloomberg Terminal, Bloomberg’s data and proprietary trading platform. First brought to market in the early 80s the system has over the decades earned its title as the leading market data source and a must have for any financial institution looking to execute in the markets. This is reflected in its annual subscription now nearing $30,000. For this reason, the system is favoured by institutional investors as opposed to individual ones.
Its black background and computerised white text might seem a little out of date to individuals outside of the industry but its role in the financial markets has cemented this interface as a poster child for financial services. Home to Bloomberg’s central data services the interface offers users access to news, data, analytics, and multi-asset trading tools. Given its widespread adoption by institutions it’s also a people move source as users can see up to date contact details of peers. According to Bloomberg, it offers sell-side and independent research from over 1,500 sources as well as proprietary research on various industries and markets.
- CLS
Coming in at number three is the multi-currency settlement system, CLS. While perhaps not one of the most exciting aspects of the trade lifecycle, settlement is a central process that acts as a pillar for the capital markets. The settlement period relates to the space of time between the trade date and the settlement date when a trade is considered complete. Within this window both the buyer and seller must undertake any necessary actions to ensure the transaction can be completed.
Established in 2002, the CLS network is designed to minimise risk and offer operational efficiency to institutions within the settlement window by avoiding bilateral settlement that is more likely to fail.
The settlement window has found itself in the industry spotlight as of late thanks to the recent decision from regulators in the US to move North American markets to a T+1 settlement period, down from T+2.
- Central limit order book (CLOB)
While it is easy to romanticise the sheer graft that went into trading a few decades ago, the introduction of central limit order books (CLOBs) and streamed pricing were much-needed innovations. The idea that in order to understand the changing price of an individual stock or security, one would have to study daily directories and newspapers is something that many of those starting out in the industry today will never understand. With no central directory of orders in the market, understanding pricing must have been a headache to say the least, leaving many individuals subject to arduous process of calling everyone in the phone book.
CLOBs allow for transparency of live orders that are prioritised by price and time. By seeing what is available on the order book, traders have an idea of how much volume can be executed at a specific price. Facilitated by exchanges, a CLOB allows buyers and sellers to submit their trading interests and then utilises a matching engine to match buy and sell orders based on specific requirements such as price time priority. Once a trade has been matched the buy and sell orders are removed from the order book and the bid and ask prices are updated accordingly to reflect the change.
CLOBs offer greater transparency and consolidated liquidity meaning participants have a greater chance of trading. They’re typically used in equities given that this asset class trades on exchange unlike fixed income and some foreign exchange assets. Thanks to huge leaps in technology, participants can hide their full amounts in what’s known as “iceberg orders” that replenish the order book once liquidity has been matched and removed from the book.
- Algorithmic trading
Rounding out the top five of The TRADE’s rankings of the most influential innovations to come to trading are algorithms and the concept of executing algorithmically or automatically. Most common for low touch and ‘easy flow’ algorithms are often used for small orders in highly liquid markets. Algorithms are a computer programmed trading workflow that follows a defined set of parameters. These parameters could be anything from liquidity seeking to volume dependant or venue-specific such as dark seeking.
Algorithms often offer traders a quick and easy route to market. They remove the opportunity for human error by taking away any manual processes and offer a low latency solution that will often achieve best execution and avoid any unwanted price changes.
While this all sounds fantastic and you may be wondering why they aren’t used for all flow, there are some downsides. Unpredictable activity in the markets such as Black Swan events can render algorithms that rely on historical data useless and result in losses for firms. At the other end of the spectrum, a lack of human judgement and intervention can sometimes result in lesser results in nuanced situations that require human intuition.
Buy-side institutions will often use a broker’s algorithmic suite for execution, with many sell-side institutions vying for the interest of clients with the launch of new and innovative products with flashy names. Less common is the development of proprietary algorithms inhouse on the buy-side given the cost, time to implement, and the speed at which priorities evolve. For more information on algorithmic trading providers, check out The TRADE’s annual survey....
....MUCH MORE
I'd have to go with pockets. Or more broadly, storage in all its guises:
Following Up On "Commodity traders superior to chimpanzees": The Importance of Pockets
Storage: Very Important To Roman Emperors and Commodities Market Manipulators
*****
....How can you not love a book whose very Preface begins:
How do you know an empire when you see one? One classic answer to thisIf interested see also at Cornell Research:
comparative conundrum is to look at storage facilities. Empires, it is assumed,
extract and centralize resources from across their territories, a brute imperialism
that finds expression in massive, central storage complexes and a continuing
concern with the circulation of stuff. The dazzling archaeological remains of
storerooms at Rome's ports of Ostia and Portus are testimony that the Roman
empire fits this rather restricted bill. But what can storage do beyond this
exercise of identification? Storage has more to offer the student of the Roman
world: as a topic that is at once at the core of survival and prone to envy, strife,
and competition; as a practice that is both grounded in the matter of economics
and inhabiting the social imagination, as an acute concern for farmers and
rulers alike - storage opens up an inquiry into the very anatomy of Roman
socio-economics....
The Emperor’s Closet—Power and Storage
Previously on the Storage Channel:
"The Effect of Futures Markets and Corners on Storage and Spot Price Variability".
To Create A "1%" In A Social Hierarchy You Don't Need An Economic Surplus, Just A Storable Form Of Wealth
The Golden Age of Commodities Market Manipulation: Corners, Storage and Squeezes
These days however, to purloin that wealth, you don't even need to be dealing with storables:
How to Manipulate Non-storable Commodities Markets
Remember, the spectrum runs from storage to hoarding to market corners.
And corners in commodities refers to physical, you can't corner a commod
by simply buying futures or forwards, you also have to take up the
physical supply.
Conversely, squeezes are accomplished in the futures..
"Large Investors, Price Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners"
"Market Manipulation, Bubbles, Corners and Short Squeezes"
The only way to combat abundance is with artificial scarcity, i.e. manipulation....
And back to pockets:
London Property Will Always Be Affordable
"The money is always there, it's only the pockets that change"-Gertrude Stein,
Also attributed to Coco Channel as:
"Money is money is money, it's only the pockets that change".
Possibly related:
What Have The Etruscans Ever Done For Us? (freeports and other storage facilities)
