In the trading technology world lower latency will always be welcomed, but everyone’s attention is now on a different topic—accessibility.
John Yoo, product manager of automated trading at Trading Technologies, demonstrates exactly what this means by firing up Algo Design Lab (ADL), which allows traders to visually create strategies. A series of color-coded lines and shapes on a grid represent a trading strategy that can be executed immediately (see “Next gen stuff,” below). This is very different from hiring a developer to code a strategy that could take months. “The time from idea to delivery is very short,” Yoo says.
TT is launching a new platform that will allow traders to visually draw out algorithms from the comfort of their Web browser. While ADL is a few years old already, the ability to launch it from the Web is a new feature. “If you’ve got a Web browser, you can have access to cutting-edge technology,” says TT CEO Rick Lane.
TT’s new platform, which may be launched as early as the first half of 2015, consolidates all of the technology that the firm has developed during the past several years. It offers an interface, which aims to be as user-friendly and accessible as possible. Nothing needs to be downloaded or installed. To accomplish this, TT had to re-code its entire platform, ensuring that they would not compromise the effectiveness of the technology for accessibility.
TT is not the only firm that is focusing on making their technologies more accessible. “Every technology provider is trying to make their technology more accessible,” Lane says. To remain relevant in the industry, firms are required to start thinking about user experience.
New trading experience
Sanjib Sahoo, chief information officer of tradeMONSTER, says, “Technology should be used to build a seamless customer experience.” This may include introducing responsive design and even predicting what tools the user may need.
This is where trending technologies such as big data can come in. Using analytics, firms can segment their user base and create customized tools for each segment. “If you understand your customer segment, you can create a customized [user interface] specifically for that customer if you know their behavior,” he says.
Sahoo warns that while a flashy interface may attract new customers, it is not the determining factor in assessing the quality of a platform. “Change should focus not on just technology, but should create real value for the customer,” he argues. “If it is not performing, it will not be valuable to the customer.”
The trend toward greater connectivity will also prove to be a challenge for technology firms, as more professional traders demand access to their portfolios on mobile devices.
“We’re connected with so many devices, what’s happening in consumer trends is driving how traders are connected to their portfolio,” Sahoo says. Just a few years ago, no one expected trading to go mobile. Now, mobile functionality is a necessity for trading platforms. “Real-time access, anywhere, any time” is what technology firms should be aiming for, says Sahoo.
TT has already moved into the connectivity trend. “Everybody’s going mobile,” says Stefani Sandow, product manager of user experience at TT. “Everybody demands this online-anywhere accessibility from the tools they use at work.” Being able to use the trading platforms from a tablet or mobile phone while in a remote hotel room or on a train, for example, is the new standard, and not just for retail traders.
Another company working to improve services for traders is Wolverine Execution Services, which launched WEX Vega Trader, a new trading applet that allows users to specify a target amount of vega to execute across a range of option expirations and strikes. Vega Trader helps traders manage risk by allowing them to efficiently take volatility positions.
“With our extensive background and knowledge of options and volatility trading, we built Vega Trader to meet the growing demand from clients for more sophisticated tools for volatility strategies,” said Kevin Kernan, Director of WEX Product Development. “Vega Trader expands our volatility and hedging product suite to allow for lists of options to be traded, monitored, and hedged through one simple mechanism.”
In addition, new technologies may improve the efficiency of trading. Thomas Rollinger, managing partner at Red Rock Capital, has witnessed this evolution. Years ago, he was surprised to find a CTA that employed traders who still called in orders with a land line. “I learned at an early stage in my career that sophisticated software could, in some cases, replace a room full of six to eight people,” he says.
The move towards electronic trading and the use of algorithms, as well as the general democratization of technology, have helped the market become more efficient during a shorter timeframe. No longer is an engineering background needed to construct a trading strategy.
“You’re going to see the cost of technology dropping, which is going to make it more accessible to the segments of the market that don’t have the resources to pay professionally,” Lane says.
Yet with such power at everyone’s fingertips comes a cause for concern.
One concern with new technology Yoo emphasizes is its security: programming syntax errors are impossible when you are drawing shapes. “The only error that is possible is errors of human logic,” he says. So theoretically, you could still accidentally “buy the national debt of Greece,” but if you do, it will not be due to a programming error.
Giving people these new, powerful tools will understandably make some risk managers nervous. In the past, these technical capabilities have been self-regulated: not everyone had the knowledge and skill to create these tools. Now, increased access has opened the floodgates.
“You’re really giving a pretty powerful tool to folks who historically have not had that,” says Lane. “As soon as you start to put something like ADL into the retail end, you’ll see a strong demand for the proper tools to make sure that we all remain safe.” The efficiency gains that more accessible platforms bring will need to be accompanied with more technology to regulate them.
Sahoo also prioritizes security, but from a different perspective. Technology firms have the responsibility of protecting their own systems against outside attacks that would compromise their users’ information.
“A lot of times, we focus on what customers like,” Sahoo says. “But we need to keep security in mind. Customers don’t want to put money in a hacked system.”
As the customer base grows, firms will need to be more aware of potential security risks. Sahoo cites [cyber] security, two-factor authentication and increased protection against DDoS attacks as important security measures that are trending in the industry. Ultimately, the burden of providing a safe trading environment falls on the firms. “You can’t force customers to update their malware software,” he says, predicting that security will be 2015’s big buzzword.
Then there is also the issue of traders not knowing what they are doing. Increased accessibility may make trading seem easy, when there is actually a lot of risk involved. Murray Ruggiero, the chief systems designer and market analyst at Tuttle Tactical Management, warns against underestimating the complexities of the market. He also points out that a growing trend towards patenting software may dampen innovation (see “Trading innovation vs. patent law,” next page).
“The big problem with accessibility is the education of the customer,” he argues. “You can give them all this technology and all these platforms, but they’re not going to survive trading if they don’t understand the markets.”
Implementing trading strategies now may be getting easier, thanks to technology, but that does not necessarily mean that traders are getting smarter.
To make matters worse, some people are aware of this education gap and are capitalizing on it. “A lot of people are teaching stuff that sounds good, that are simple, but the stuff doesn’t work,” Murray asserts. Education-wise, the only people he thinks that traders should pay attention to are those who have managed money and built systems, or traded with their own money. Institutions also tend to have better appreciation of risk.
Ultimately, while technology can increase efficiency and make trading more accessible to a wider audience, being smart is up to the trader. An automated algorithm, even when free of programming issues, cannot transform you into a better trader.
Technology firms should ensure that the products they put out will actually be valuable to the customer—analyzing big data may be one way of doing that. They should check that the security is airtight. On the user side, traders should make sure they have the proper education before diving into the market, even though mistakes may be inevitable.
“I expect there to remain capturable inefficiencies that arise out of human investor behavior,” Rollinger says. “The major tenets of behavioral finance will not likely go away.”
In the meantime, traders, both retail and professional, can expect exciting new developments in technology. The trick is to not equate accessibility with invincibility.
Trading innovation vs. patent law
by Murray Ruggiero Jr.
Computer hardware has long been ahead of software in terms of contributing to performance and speed for non-institutional traders. Most, if not all, of the modern processors come with multiple cores, but trading programs only use one processor. Making the software work on more than one core requires rewriting code.
Now, many retail software platforms are implementing multicore technology. These advancements will attract technical people who may not necessarily be traders. For example, scientists as well as others schooled in the scientific method of research may be more interested in trading as well as intrinsic “tinkerers” like engineers and mathematicians. Giving users software that can take full advantage of the hardware enables them to test ideas that were not feasible before. These tools, like the onset onf the personal computer 35 years prior, have the potential to turn hobbyists into enthusiastic traders who build a new generation of trading technology. With higher-end computers, it is possible to develop complex, sophisticated models of how the markets work.
The modern day “patent troll” can stifle the innovation of new trading technologies. A patent troll obtains the patents being sold at auctions by bankrupt companies. In addition, they try and file patents that are based on prior works hoping that the patent examiner doesn’t fully understand the technology. They do just enough research to make it look original. Then, once granted, patent trolls launch lawsuits against infringing companies or hold on to the patent without using the idea in an attempt to halt other companies’ productivity or force them to pay for the right to use patented technology.
The way the Patent Law has been applied to software and trading is a serious problem. One of the most well-known cases is the Wagner Patent where a former Commodity Futures Trading Commission official was granted a patent, that was subsequently sold, on a system of electronic matching of futures orders even though the concept had been in the public domain for years. There had been a significant amount of litigation on this patent before it expired. This is only one example, however. There are hundreds or thousands of patents on trading methods and indicators that are really just minor improvements upon a prior idea. Some firms patent their research just as a defense mechanism in case another firm is doing parallel work and later claim infringement. The problem is that this creates a greater disparity between retail and institutional traders. Institutional traders are not afraid to innovate because the methods that they develop are used in-house and treated as trade secrets. The issue occurs once they wish to publish that work or share it with retail traders. When that happens, the patent holders can sue for infringement. This makes companies very reluctant to share their new ideas with customers, thereby discouraging innovation and collaboration. Often, patent examiners and judges don’t understand the technology and companies will act on the safe side and not share their ideas with anyone else, significantly hindering innovation.
In Alice v. CLC Bank, Alice Corp. was the owner of four patents for basically creating an electronic escrow service for facilitating financial transactions. CLS Bank began to use a similar technology in 2002 and Alice notified CLS Bank of the possible infringement. A lawsuit ensued, which went all the way to the U.S. Supreme Court. The focus of the case was simple: what is patentable material? This is hardly an original idea or particularly unique implementation of that idea. In the end, the Court agreed. They found Alice’s patents to be invalid because the claims were based on an abstract idea and simply implementing those claims as a computer program did not transform that basic idea into a patentable invention.
A new age of hardware and impressive software that can take advantage of all that power will lead to a new generation of trading technology. Highly talented people with new views of the market will have access to powerful computers and be able to use their skills to create new trading concepts. Patent litigation is a problem, however. If the fear of lawsuits is pervasive, then institutions won’t feel free to share their ideas and technology with other traders, thereby stifling innovation.
Skylar Zhang is a journalism student at Northwestern University in Evanston, Ill., and currently is interning at Futures.