Trading up: How Microsoft-supported systems help transform the securities industry
Quantitative trading strategies, including algorithmic trading and arbitrage (or strategy trading), have emerged as the next generation of solutions in the electronic trading markets. The popularity of quantitative trading is driven more by the changing structure of the market than by the revolutionary capabilities of algorithmic trading. Fragmentation in the market and lower commission price points have driven the buy side to use algorithms. At the same time, institutional brokers use algorithms to lower their own trading costs. In doing so, they support low commission price points.
This practice has spawned a race to algorithms among brokers eager to provide more value to their customers and to gain mind and market share in the quantitative trading space. It has also changed the role of technology in capital markets.
“Technology once supported business functions—now it defines them,” says Kenny McBride, Microsoft global industry manager for capital markets.
To achieve the best algorithmic trading results, companies must have the following:
| • | Immediate access to high volumes of market data |
| • | Sound mathematical models to analyze the data |
| • | Capacity to execute trades in a timely manner |
All of these functions depend on fast, reliable technology. “You’re looking at subsecond responses to vast amounts of data coming from the marketplace,” McBride says. “And the more that companies use algorithmic trading, the more data they create. These algorithms generate orders on a second-by-second basis, so companies are becoming more reliant on technology to make algorithmic trading work.”
Microsoft delivers the data
Microsoft Windows Server System integrated server software provides an end-to-end integrated set of tools and services for facilitating precise, high-speed algorithmic trading. A variety of partner solutions built on the Microsoft Windows operating system are available to help securities firms analyze huge volumes of market data and identify trade opportunities. Microsoft partner Vhayu, for example, provides a calculation engine built on the Windows platform that can handle up to 400,000 updates (or market ticks) per second.
An IT infrastructure built on the Windows Server System performs three critical functions:
| • | Data management Windows Server System can provide superior performance and scalability in managing data. Offerings such as Microsoft SQL Server Reporting Services enable the timely creation and management of interactive, Web-based reports. The seamless integration between front-end Microsoft Office tools such as Microsoft Office Excel spreadsheet software and the backend Windows-based infrastructure provide the ideal algorithmic trading environment. |
| • | Real-time data distribution Getting data from the database to the desktop can be quick and easy with Microsoft SQL Server and Microsoft BizTalk Server. And, with Web services, market data can be pushed directly to an Excel spreadsheet for fast graphing and analysis. |
| • | Streamlined collaboration Data isn’t the only asset in algorithmic trading. Brokerage firms depend on innovative quantitative models as well. Microsoft Windows SharePoint Services provides a central location where analysts can share mathematical models and build on ideas across business units. |
The mathematician's tool of choice: Microsoft Office
While reliable back-end systems are important, the critical work of algorithmic trading occurs at the desktop.
“Speed of execution is important, of course,” McBride says, “but it is in the pre- and post-analysis where a broker can really make a difference.” That’s where a tool such as Microsoft Office Excel adds value. “People can create new mathematical models in Excel and use them to exploit new trading strategies in hours rather than days,” says McBride.
After a broker sets the parameters for a model, Microsoft Excel can actually push the data to an automanagement system through a Web service. Excel can also execute trades directly in the stock exchange.
While Excel is the most widely used application in the financial services industry, other Microsoft desktop tools play a defining role in capital markets. For example, Microsoft partners are building on XML forms created in the Microsoft Office InfoPath information gathering program to automate trades in the derivative market.
“It’s not the IT people. It’s the front office people—the mathematicians—who now define how technology can be used in the business world," McBride says. "And Microsoft Office is their tool of choice."
Making the move from a mainframe
In the capital markets industry, profit margins have been steadily shrinking for the past 10 years. This means cost management is essential. Many securities firms can no longer afford to maintain the expensive mainframe technologies they once relied on. Microsoft offers a modern system with greater capacity at much less expense.
Dallas-based Southwest Securities, for example, saved more than $2 million per year by replacing its mainframe-based architecture with Microsoft SQL Server 2000. Its processing capacity is now five times what it was with a mainframe.
“It can cost millions of dollars just to maintain a mainframe,” McBride says. “An infrastructure based on Windows Server technology with SQL Server and BizTalk supports current business processes. It’s scalable and comes at a fraction of the cost of a mainframe.”
