Trading room
Encyclopedia
A trading-room gathers traders
operating on financial market
s.
The trading-room is also often called the front office
.
The terms dealing-room and trading-floor are also used, the latter being inspired from that of a open outcry
stock exchange
.
As open outcry is gradually replaced by electronic trading
, the trading-room gets the only living place that is emblematic of the financial market.
It is also the likeliest place within the financial institution
where the most recent technologies
are implemented before being disseminated in its other business
es.
s’ capital market
businesses were mostly split in as many departments, sometimes scattered in several sites, as market segments: money market
(domestic and currencies), foreign exchange
, long-term financing, exchange, bond market
... By gathering these teams to a single site, banks want to ease :
brokers, such as Morgan Stanley
, from 1971, with the creation of NASDAQ
, which requires an equity
trading desk on their premises, and the growth of the secondary market
of federal debt products, which requires a bond
trading desk.
The spread of trading-rooms in Europe, between 1982 and 1987, has been subsequently fostered by two reforms of the financial markets organization, that were carried out roughly simultaneously in Britain
and France
.
In Britain, the Big bang
on the London Stock Exchange
, removed the distinction between brokers and jobbers, and prompted US investment banks, hitherto deprived of access to the LSE, to set up a trading-room in the City of London
.
In France, the deregulation of capital markets, carried out by Pierre Bérégovoy
, Economics and Finance Minister, between 1984 and 1986, led to the creation of money-market instruments, of an interest-rate futures
market, MATIF
, of an equity options market, MONEP, the streamlining of sovereign debt management, with multiple-auction
bond issues and the creation of a primary dealer status. Every emerging market segment raised the need for new dedicated trader positions inside the trading-room.
:
Brokers and investment banks set up their trading-rooms first and large asset-management firms subsequently followed them.
The business type determines peculiarities in the organisation and the software environment inside the trading-room.
.
An investment bank’s typical room makes a distinction between :
Sales make deals tailored to their corporate customers’ needs, that is, their terms are often specific. Focusing on their customer relationship, they may deal on the whole range of asset types.
Many large institutions have grouped their cash and derivative desks, while others, such as UBS or Deutsche Bank
, for example, giving the priority to customer relationship, structure their trading-room as per customer segment, around sales desks.
Some large trading-rooms hosts offshore
traders, acting on behalf of another entity of the same institution, located in another time-zone. One room in Paris
may have traders paid for by the New York
subsidiary
, and whose working hours are consequently shifted. On the foreign exchange
desk, because this market is live on a 24/24 basis, a rolling book organisation can be implemented, whereby, a London
-based trader, for instance, will inherit, at start of day, the open positions handed over by the Singapore
, Tokyo
, or Bahrein room, and manages them till his own end-of-day, when they are handed over to another colleague based in New York
.
Some institutions, notably those that invested in a rapid development (RAD
) team, choose to blend profiles inside the trading-room, where traders, financial engineers and front-office dedicated software developers sit side by side. The latter therefore report to a head of trading rather than to a head of IT.
More recently, a profile of compliance
officer has also appeared ; he or she makes sure the law, notably that relative to market use, and the code of conduct, are complied with.
The middle office
and the back office
are generally not located in the trading-room.
The organisation is somewhat simpler with asset management firms :
The development of trading businesses, during the eighties and nineties, required ever larger trading rooms, specifically adapted to IT- and telephony
cabling. Some institutions therefore moved their trading-room from their downtown premises, from the City
to Canary Wharf
, from inner Paris to La Défense
, and from Wall Street
towards Times Square
or New York
’s residential suburbs in Connecticut
; UBS Warburg, for example, built a trading-room in Stamford, Connecticut
in 1997, then enlarged it in 2002, to the world’s largest one, with about 100000 sq ft (9,290.3 m²) floor space, allowing the installation of some working positions and monitors.
The « Basalte » building of Société Générale
is the first ever building specifically dedicated to trading-rooms ; it is fit for double power sourcing, to allow trading continuity in case one of the production sources is cut off.
JP Morgan is planning to construct a building, close to the World Trade Center site
, where all six 60000 sq ft (5,574.2 m²) floors dedicated to trading-rooms will be cantilever
ed, the available ground surface being only 32000 sq ft (2,972.9 m²).
and teleprinter
have been the broker's first main tools. The teleprinter, or teletype, got financial quote
s and printed them out on a ticker tape. US equities were identified by a ticker symbol
made of one to three letters, followed by the last price, the lowest and the highest, as well as the volume of the day. Broadcasting neared real time, quotes being rarely delayed by more than 15 minutes, but the broker looking for a given security
's price had to read the tape...
As early as 1923, the Trans-Lux company installed the NYSE with a projection system of a transparent ticker tape onto a large screen. This system has been subsequently adopted by most NYSE-affiliated brokers till the 1960s.
In 1956 a solution called Teleregister, came to the market ; this electro-mechanical board existed in two versions, of the top 50 or top 200 securities listed on the NYSE ; but one had to be interested in those equities, and not in other ones...
During the 1960s, the trader’s workstation
was remarkable for the overcrowding of telephones. The trader juggled with handsets to discuss with several brokers simultaneously. The electromechanical, then electronic, calculator
enabled him or her to perform basic computations.
In the 1970s, if the emergence of the PABX gave way to some simplification of the telephony equipment, the development of alternative display solutions, however, lead to a multiplication of the number of video monitor
s on their desks, pieces of hardware that were specific and proprietary to their respective data provider.
Telerate, Reuters
, Bloomberg
, Knight-Ridder, Quotron, Bridge were the main actors of the financial data market, more or less specialised on the money market, foreign exchange, securities market segments, respectively, for the first three of them.
s emerged, the products on offer being split between the MS-DOS
/Windows/PC world and the Unix
world. For PC, there was Lotus 1-2-3, it was quickly superseded by Excel
, for workstations and terminals
. For UNIX, there was Applix
and Wingz among others. Along video monitors, left space had to be found on desks to install a computer
screen.
Quite rapidly, Excel
got very popular among traders, as much as a decision support tool as a means to manage their position, and proved to be a strong factor for the choice of a Windows NT
platform at the expense of a Unix or VAX/VMS platform.
Though software alternatives multiplied during this decade, the trading room was suffering from a lack of interoperability
and integration. To begin with, there was scant automated transmission of trades from the front-office desktop tools, notably Excel, towards the enterprise application software that gradually got introduced in back-offices ; traders recorded their deals by filling in a form printed in a different colour depending on the direction (buy/sell or loan/borrow), and a back-office clerk came and picked piles of tickets at regular intervals, so that these could be re-captured in another system.
The digital revolution, which started in the late 1980s, was the catalyst that helped meet these expectations. It found expression, inside the dealing room, in the installation of a digital data display system, a kind of local network. Incoming flows converged from different data providers, and these syndicated data were distributed onto traders’ desktops. One calls a feed-handler the server
that acquires data from the integrator and transmits them to the local distribution system.
Reuters, with its TRIARCH 2000, Teknekron, with its TIB, Telerate with TTRS, Micrognosis with MIPS, soon shared this growing market. This infrastructure is a prerequisite to the further installation, on each desktop, of the software that acquires, displays and graphically analyses these data.
This type of software usually enables the trader to assemble the relevant information into composite pages, comprising a news panel, in text format, sliding in real time from bottom to top, a quotes panel, for instance spot rates against the US dollar, every quote update or « tick » showing up in reverse video during one or two seconds, a graphical analysis panel, with moving averages, MACD
, candlesticks or other technical indicators, another panel that displays competitive quotes from differents brokers, etc...
Two software package
families were belonging to this new generation of tools, one dedicated to Windows-NT platforms, the other to Unix and VMS platforms.
However Bloomberg and other, mostly domestic, providers, shunned this movement, preferring to stick to a service bureau
model, where every desktop-based monitor just displays data that are stored and processed on the vendor’s premises. The approach of these providers was to enrich their database and functionalities enough so that the issue of opening up their datafeed to any spreadsheet or third-party system gets pointless.
This decade also witnessed the irruption of television inside trading-rooms. Press conferences held by central bank
presidents are henceforth eagerly awaited events, where tone and gestures are decrypted. The trader has one eye on a TV set, the other on a computer screen, to watch how markets react to declarations, while having, very often, one customer over the phone. Reuters, Bloomberg, CNN
, CNBC
each propose their news channel specially dedicated to financial markets.
triggered the fall of the cost of information, including financial information. It hit a serious blow to integrators who, like Reuters, had invested a lot the years before to deliver data en masse and in real time to the markets, but henceforth recorded a wave of terminations of their data subscriptions as well as flagging sales of their data distribution and display software licences.
Moreover, the cable operators’ investors lead to a huge growth of information capacity transport worldwide. Institutions with several trading rooms in the world took advantage of this bandwidth
to link their foreign sites to their headquarters in a hub and spoke model. The emergence of technologies like Citrix supported this evolution, since they enable remote users to connect to a virtual desktop
from where they then access headquarters applications with a level of comfort similar to that of a local user. While an investment bank previously had to roll out a software in every trading-room, it can now limit such an investment to a single site. The implementation cost of an overseas site gets reduced, mostly, to the telecoms budget.
And since the IT architecture gets simplified and centralised, it can also be outsourced. Indeed, from the last few years, the main technology providers active on the trading-rooms market have been developing hosting
services.
algorithms, the fragility of worksheets incurring the risk of loss of critical data, the mediocre response times delivered by PCs when running heavy calculations, the lack of visibility of the traders’ goings-on, have all raised the need for shared information technology, or enterprise applications as the industry later called it.
But institutions have other requirements that depend on their business, whether it is trading or investment.
Such processes require mutualisation of data.
Hence a number of package software come to the market, between 1990 and 1993 : Infinity, Summit, Kondor+
, Finance Kit, Front Arena, Murex and Sophis
Risque, are quickly marketed under the umbrella of « risk-management », a term more flattering though somewhat less accurate than that of « position-keeping ».
Though Infinity died, in 1996, with the dream of the « toolkit » that was expected to model any innovation a financial engineer could have designed, the other systems are still well and alive in trading-rooms. Born during the same period, they share many technical features, such as a three-tier architecture, whose back-end runs on a Unix platform, a relational database
on either Sybase
or Oracle
, and a graphical user interface
written in English, since their clients are anywhere in the world. Capture of transactions by traders, position-keeping, measure of market risk
s (interest-rates and foreign exchange), calculation of Profit & Loss (« P&L »), per desk or trader, control of limits set per counterparty, are the main functionalities delivered by these systems.
These functions will be later entrenched by national regulations, that tend to insist on adequate IT : in France, they are defined in 1997 in an instruction from the “Commission Bancaire” relative to internal control.
(OTC) markets, is prone to misunderstandings. Should the two parties fail to clearly understand each other on the trade terms, it may be too late to amend the transaction once the received confirmation reveals an anomaly.
The first markets to discover electronic trading
are the foreign-exchange markets. Reuters creates its Reuter Monitor Dealing Service in 1981. Contreparties meet each other by the means of the screen and agree on a transaction in videotex
mode, where data are loosely structured. Its next generation product, an electronic trading platform
called Dealing 2000, ported on Windows, is launched in 1989. Like EBS
, which competes with it head-on from 1997, it mostly handles spot trades.
Several products pop up in the world of electronic trading including Bloomberg Terminal
, BrokerTec
, TradeWeb
and Reuters 3000 Xtra
for securities and foreign exchange. While the Italian-born Telematico (MTS) finds its place, in the European trading-rooms for trading of sovereign-debt.
More recently other specialised products have come to the market, such as Swapswire, to deal interest-rate swaps, or SecFinex
and Equilend, to place securities loans or borrowings
(the borrower pays the subscription fee to the service).
However, these systems also generally lack liquidity. Contrarily to an oft-repeated prediction, electronic trading did not kill traditional inter-dealer brokerage. Besides, traders prefer to mix both modes : screen for price discovery, and voice to arrange large transactions.
s must be collected and centralised ; some part of them can be diverted for internal matching, through so-called Alternative Trading Systems
(ATS) ; orders with a large size, or on equities with poor liquidity or listed on a foreign bourse, and orders from corporate customers, whose sales contact is located in the trading-room, are preferably routed either towards brokers, or to multilateral trading facilities
(MTF) ; the rest goes directly to the local stock exchange, where the institution is electronically connected to.
Orders are subsequently executed, partially of fully, then allocated to the respective customer accounts. The increasing number of listed products and trading venues have made it necessary to manage this order book
with an adequate software.
Stock exchanges and futures markets propose their own front-end system to capture and transmit orders, or possibly a programming interface, to allow member institutions to connect their order management system they developed in-house. But software publishers soon sell packages that take in charge the different communication protocols to these markets; The UK-based Fidessa
has a strong presence among LSE
members ; Sungard Global Trading
and the Swedish Orc Software
are its biggest competitors.
A typical usage of program trading is to generate buy or sell orders on a given stock as soon as its price reaches a given threshold, upwards or downwards. A wave of « stop » sell orders has been largely incriminated, during the 1987 financial crises, as the main cause of acceleration of the fall in prices. However, program trading has not stopped developing, since then, particularly with the boom of ETFs
, mutual funds mimicking a stock-exchange index, and with the growth of structured asset management ; an ETF replicating the FTSE 100 index, for instance, sends multiples of 100 buy orders, or of as many sell orders, every day, depending on whether the fund records a net incoming or outgoing subscription flow. Such a combination of orders is also called a “basket”. Moreover, whenever the weight of any constituent stock in the index changes, for example following an equity capital increase, by the issuer, new basket orders should be generated so that the new portfolio distribution still reflects that of the index. If a program can generate more rapidly than a single trader a huge quantity of orders, it also requires monitoring by a financial engineer, who adapts its program both to the evolution of the market and, now, to requirements of the banking regulator
checking that it entails no market manipulation
. Some trading-rooms may now have as many financial engineers as traders.
The spread of program trading variants, many of which apply similar techniques, leads their designers to seek a competitive advantage by investing in hardware that adds computing capacity or by adapting their software code to multi-threading
, so as to ensure their orders reach the central order book before their competitors’. The success of an algorithm
therefore measures up to a couple of milliseconds.
This type of program trading, also called high-frequency trading
, conflicts however with the fairness principle between investors, and some regulators consider forbidding it
.
; should it diverge by too much, he would need a mechanism to rebalance it by generating automatically a number of buys and sells so that the portfolio distribution gets back to the benchmark’s.
Another software family, that of asset management, meets such kind of requirements.
Bloomberg, Decalog, Apollo, Triple A, Sophis Value, SimCorp
, are the main actors of this market.
.
In Germany, the regulation goes further, a "four eyes’ principle" requiring that every negotiation carried by any trader should be seen by another trader before being submitted to the back-office.
In Continental Europe, institutions have been stressing, since the early 1990s, on Straight Through Processing
(STP), that is, automation of trade transmission to the back-office. Their aim is to raise productivity of back-office staff, by replacing trade re-capture by a validation process. Publishers of risk-management or asset-management software meet this expectation either by adding back-office functionalities within their system, hitherto dedicated to the front-office, or by developing their connectivity, to ease integration of trades into a proper back-office-oriented package.
Anglo-Saxon institutions, with fewer constraints in hiring additional staff in back-offices, have a less pressing need to automate and develop such interfaces only a few years later.
On securities markets, institutional reforms, aiming at reducing the settlement lag from a typical 3 business days, to one day or even zero day, can be a strong driver to automate data processes.
As long as front-office and back-offices run separately, traders most reluctant to capture their deals by themselves in the front-office system, which they naturally find more cumbersome than a spreadsheet, are tempted to discard themselves towards an assistant or a middle-office clerk. An STP policy is then an indirect means to compel traders to capture on their own. Moreover, IT-based trade-capture, in the shortest time from actual negotiation, is growingly seen, over the years, as a “best practice” or even a rule.
Banking regulation tends to deprive traders from the power to revalue their positions with prices of their choosing. However, the back-office staff is not necessarily best prepared to criticize the prices proposed by traders for complex or hardly liquid instruments and that no independent source, such as Bloomberg, publicize.
In the case of Northern Rock
, Bear Stearns
or Lehman Brothers
, all three wiped out by the subprime crisis, in 2008, if the trading-room finally could not find counterparts on the money market to refinance itself, and therefore had to face a liquidity crisis
, each of those defaults is due to the company’s business model
, not to a dysfunction of its trading-room.
On the contrary, in the examples shown below, if the failure has always been precipitated by market adverse conditions, it also has an operational cause :
These operational causes, in the above columns, are due to organisational or IT flaws :
sector. The term is often used to refer to the liabilities and odds setting departments of bookmakers where liabilities are managed and odds are adjusted. Examples include internet bookmakers based in the Caribbean and also legal bookmaking operations in the United Kingdom such as William Hill
, Ladbrokes
and Coral which operate trading rooms to manage their risk. The growth of betting exchanges such as Betfair has also led to the emergence of "trading rooms" designed for professional gamblers. (reference: Racing Post newspaper 19/7/07) The first such establishment was opened in Edinburgh in 2003 but later folded. Professional gamblers typically pay a daily "seat" fee of around £30 per day for the use of IT facilities and sports satellite feeds used for betting purposes. Today there are eight such trading rooms across the UK, with two based in London - one in Highgate
and one in Canary Wharf.
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
operating on financial market
Financial market
In economics, a financial market is a mechanism that allows people and entities to buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect supply and demand.Both general markets and...
s.
The trading-room is also often called the front office
Front office
Front office is a business term that refers to a company's departments that come in contact with clients, including the marketing, sales, and service departments...
.
The terms dealing-room and trading-floor are also used, the latter being inspired from that of a open outcry
Open outcry
Open outcry is the name of a method of communication between professionals on a stock exchange or futures exchange. It involves shouting and the use of hand signals to transfer information primarily about buy and sell orders...
stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
.
As open outcry is gradually replaced by electronic trading
Electronic trading
Electronic trading, sometimes called etrading, is a method of trading securities , foreign exchange or financial derivatives electronically...
, the trading-room gets the only living place that is emblematic of the financial market.
It is also the likeliest place within the financial institution
Financial institution
In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
where the most recent technologies
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
are implemented before being disseminated in its other business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
es.
Origin
Before the sixties or seventies, the bankBank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s’ capital market
Capital market
A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...
businesses were mostly split in as many departments, sometimes scattered in several sites, as market segments: money market
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
(domestic and currencies), foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
, long-term financing, exchange, bond market
Bond market
The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the Secondary market, usually in the form of bonds. The primary goal of the bond market is to provide a mechanism for long term funding of public and...
... By gathering these teams to a single site, banks want to ease :
- a more efficient broadcast of market information, for greater reactivity of traders ;
- idea confrontation on market trends and opportunities ;
- desk co-ordination towards customers.
Context
Trading-rooms first appeared among US bulge bracketBulge bracket
The bulge bracket comprises the "big banks," the world's largest and most profitable multi-national investment banks.- Technical meaning :The term 'bulge bracket' refers to the first group of investment banks listed on the "tombstone" notifying the public of a financial transaction or deal...
brokers, such as Morgan Stanley
Morgan Stanley
Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000....
, from 1971, with the creation of NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
, which requires an equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
trading desk on their premises, and the growth of the secondary market
Secondary market
The page applies to the finanical term; For the merchandising concept, see Aftermarket .The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold....
of federal debt products, which requires a bond
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
trading desk.
The spread of trading-rooms in Europe, between 1982 and 1987, has been subsequently fostered by two reforms of the financial markets organization, that were carried out roughly simultaneously in Britain
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
and France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
.
In Britain, the Big bang
Big Bang (financial markets)
The phrase Big Bang, used in reference to the sudden deregulation of financial markets, was coined to describe measures, including abolition of fixed commission charges and of the distinction between stockjobbers and stockbrokers on the London Stock Exchange and change from open-outcry to...
on the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
, removed the distinction between brokers and jobbers, and prompted US investment banks, hitherto deprived of access to the LSE, to set up a trading-room in the City of London
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
.
In France, the deregulation of capital markets, carried out by Pierre Bérégovoy
Pierre Bérégovoy
Pierre Eugène Bérégovoy was a French Socialist politician. He served as Prime Minister under François Mitterrand from 1992 to 1993.-Early career:...
, Economics and Finance Minister, between 1984 and 1986, led to the creation of money-market instruments, of an interest-rate futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
market, MATIF
MATIF
MATIF SA is a private corporation which is both a futures exchange and a clearing house in France. It was absorbed in the merger of the Paris Bourse with Euronext NV to form Euronext Paris...
, of an equity options market, MONEP, the streamlining of sovereign debt management, with multiple-auction
Auction
An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder...
bond issues and the creation of a primary dealer status. Every emerging market segment raised the need for new dedicated trader positions inside the trading-room.
Businesses
A trading-room serves two types of businessBusiness
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
:
- trading, and arbitrageArbitrageIn economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...
, a business of investment banks and brokerBrokerA broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
s, often referred to as the sell sideSell sideSell side is a term used in the financial services industry. It is a general term that indicates a firm that sells investment services to asset management firms, typically referred to as the buy side, or corporate entities...
. - portfolio managementInvestment managementInvestment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
, a business of asset management companies and institutional investors, often referred to as the buy sideBuy sideBuy-side is a term used in investment banking to refer to advising institutions concerned with buying, rather than selling, assets or securities...
.
Brokers and investment banks set up their trading-rooms first and large asset-management firms subsequently followed them.
The business type determines peculiarities in the organisation and the software environment inside the trading-room.
Organization
Trading-rooms are made up of desks, specialised by product or market segment (equities, short-term, long-term, options…), that share a large open spacePublic space
A public space is a social space such as a town square that is open and accessible to all, regardless of gender, race, ethnicity, age or socio-economic level. One of the earliest examples of public spaces are commons. For example, no fees or paid tickets are required for entry, nor are the entrants...
.
An investment bank’s typical room makes a distinction between :
- traders, whose role is to offer the best possible prices to salesSalesA sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
, by anticipating market trends. After striking a deal with a sales, the trader arranges a reverse trade either with another trader belonging to another entity of the same institution or to an outside counterparty; - market-makersMarket makerA market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
, acting like wholesalers. Trades negotiated by market-makers usually bear standard terms.
Sales make deals tailored to their corporate customers’ needs, that is, their terms are often specific. Focusing on their customer relationship, they may deal on the whole range of asset types.
Many large institutions have grouped their cash and derivative desks, while others, such as UBS or Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
, for example, giving the priority to customer relationship, structure their trading-room as per customer segment, around sales desks.
Some large trading-rooms hosts offshore
Offshore investment
Offshore investment is the keeping of money in a jurisdiction other than one's country of residence. Offshore jurisdictions are a commonly accepted solution to reducing tax burdens levied in most countries to both large and small scale investors alike...
traders, acting on behalf of another entity of the same institution, located in another time-zone. One room in Paris
Paris
Paris is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
may have traders paid for by the New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
subsidiary
Subsidiary
A subsidiary company, subsidiary, or daughter company is a company that is completely or partly owned and wholly controlled by another company that owns more than half of the subsidiary's stock. The subsidiary can be a company, corporation, or limited liability company. In some cases it is a...
, and whose working hours are consequently shifted. On the foreign exchange
Foreign exchange
Foreign exchange may refer to:Finance* Foreign exchange markets, where money in one currency is exchanged for another* Exchange rate, the price for which one currency is exchanged for another...
desk, because this market is live on a 24/24 basis, a rolling book organisation can be implemented, whereby, a London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
-based trader, for instance, will inherit, at start of day, the open positions handed over by the Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
, Tokyo
Tokyo
, ; officially , is one of the 47 prefectures of Japan. Tokyo is the capital of Japan, the center of the Greater Tokyo Area, and the largest metropolitan area of Japan. It is the seat of the Japanese government and the Imperial Palace, and the home of the Japanese Imperial Family...
, or Bahrein room, and manages them till his own end-of-day, when they are handed over to another colleague based in New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
.
Some institutions, notably those that invested in a rapid development (RAD
Rapid application development
Rapid application development is a software development methodology that uses minimal planning in favor of rapid prototyping. The "planning" of software developed using RAD is interleaved with writing the software itself...
) team, choose to blend profiles inside the trading-room, where traders, financial engineers and front-office dedicated software developers sit side by side. The latter therefore report to a head of trading rather than to a head of IT.
More recently, a profile of compliance
Compliance (regulation)
In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Regulatory compliance describes the goal that corporations or public agencies aspire to in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and...
officer has also appeared ; he or she makes sure the law, notably that relative to market use, and the code of conduct, are complied with.
The middle office
Middle office
The middle office comprises departments of a financial services company that manage position-keeping . These divisions make sure these transaction representations properly capture profit flows given the technological resources...
and the back office
Back office
A back office is a part of most corporations where tasks dedicated to running the company itself takes place. The term "Back office" comes from the building layout of early companies where the front office would contain the sales and other customer-facing staff and the back office would be those...
are generally not located in the trading-room.
The organisation is somewhat simpler with asset management firms :
- asset managers are responsible for portfolios or funds ;
- « traders » are in contact with « brokers », that is, with the above-mentioned investment banks’« sales » ; however, this profile is absent from asset management firms that chose to outsourceOutsourcingOutsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...
their trading desk.
Telephony
In telecommunications, telephony encompasses the general use of equipment to provide communication over distances, specifically by connecting telephones to each other....
cabling. Some institutions therefore moved their trading-room from their downtown premises, from the City
City of London
The City of London is a small area within Greater London, England. It is the historic core of London around which the modern conurbation grew and has held city status since time immemorial. The City’s boundaries have remained almost unchanged since the Middle Ages, and it is now only a tiny part of...
to Canary Wharf
Canary Wharf
Canary Wharf is a major business district located in London, United Kingdom. It is one of London's two main financial centres, alongside the traditional City of London, and contains many of the UK's tallest buildings, including the second-tallest , One Canada Square...
, from inner Paris to La Défense
La Défense
La Défense is a major business district of the Paris aire urbaine. With a population of 20,000, it is centered in an orbital motorway straddling the Hauts-de-Seine département municipalities of Nanterre, Courbevoie and Puteaux...
, and from Wall Street
Wall Street
Wall Street refers to the financial district of New York City, named after and centered on the eight-block-long street running from Broadway to South Street on the East River in Lower Manhattan. Over time, the term has become a metonym for the financial markets of the United States as a whole, or...
towards Times Square
Times Square
Times Square is a major commercial intersection in the borough of Manhattan in New York City, at the junction of Broadway and Seventh Avenue and stretching from West 42nd to West 47th Streets...
or New York
New York
New York is a state in the Northeastern region of the United States. It is the nation's third most populous state. New York is bordered by New Jersey and Pennsylvania to the south, and by Connecticut, Massachusetts and Vermont to the east...
’s residential suburbs in Connecticut
Connecticut
Connecticut is a state in the New England region of the northeastern United States. It is bordered by Rhode Island to the east, Massachusetts to the north, and the state of New York to the west and the south .Connecticut is named for the Connecticut River, the major U.S. river that approximately...
; UBS Warburg, for example, built a trading-room in Stamford, Connecticut
Stamford, Connecticut
Stamford is a city in Fairfield County, Connecticut, United States. According to the 2010 census, the population of the city is 122,643, making it the fourth largest city in the state and the eighth largest city in New England...
in 1997, then enlarged it in 2002, to the world’s largest one, with about 100000 sq ft (9,290.3 m²) floor space, allowing the installation of some working positions and monitors.
The « Basalte » building of Société Générale
Société Générale
Société Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La...
is the first ever building specifically dedicated to trading-rooms ; it is fit for double power sourcing, to allow trading continuity in case one of the production sources is cut off.
JP Morgan is planning to construct a building, close to the World Trade Center site
World Trade Center site
The World Trade Center site , also known as "Ground Zero" after the September 11 attacks, sits on in Lower Manhattan in New York City...
, where all six 60000 sq ft (5,574.2 m²) floors dedicated to trading-rooms will be cantilever
Cantilever
A cantilever is a beam anchored at only one end. The beam carries the load to the support where it is resisted by moment and shear stress. Cantilever construction allows for overhanging structures without external bracing. Cantilevers can also be constructed with trusses or slabs.This is in...
ed, the available ground surface being only 32000 sq ft (2,972.9 m²).
The early years
TelephoneTelephone
The telephone , colloquially referred to as a phone, is a telecommunications device that transmits and receives sounds, usually the human voice. Telephones are a point-to-point communication system whose most basic function is to allow two people separated by large distances to talk to each other...
and teleprinter
Teleprinter
A teleprinter is a electromechanical typewriter that can be used to communicate typed messages from point to point and point to multipoint over a variety of communication channels that range from a simple electrical connection, such as a pair of wires, to the use of radio and microwave as the...
have been the broker's first main tools. The teleprinter, or teletype, got financial quote
Financial quote
A financial quotation refers to specific market data relating to a security or commodity. While the term quote specifically refers to the bid price or ask price of an instrument, it may be more generically used to relate to the last price which the security traded at...
s and printed them out on a ticker tape. US equities were identified by a ticker symbol
Ticker symbol
A stock symbol or ticker symbol is a short abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. "Ticker symbol" refers to the symbols that were printed on the ticker...
made of one to three letters, followed by the last price, the lowest and the highest, as well as the volume of the day. Broadcasting neared real time, quotes being rarely delayed by more than 15 minutes, but the broker looking for a given security
Security
Security is the degree of protection against danger, damage, loss, and crime. Security as a form of protection are structures and processes that provide or improve security as a condition. The Institute for Security and Open Methodologies in the OSSTMM 3 defines security as "a form of protection...
's price had to read the tape...
In 1956 a solution called Teleregister, came to the market ; this electro-mechanical board existed in two versions, of the top 50 or top 200 securities listed on the NYSE ; but one had to be interested in those equities, and not in other ones...
During the 1960s, the trader’s workstation
Workstation
A workstation is a high-end microcomputer designed for technical or scientific applications. Intended primarily to be used by one person at a time, they are commonly connected to a local area network and run multi-user operating systems...
was remarkable for the overcrowding of telephones. The trader juggled with handsets to discuss with several brokers simultaneously. The electromechanical, then electronic, calculator
Calculator
An electronic calculator is a small, portable, usually inexpensive electronic device used to perform the basic operations of arithmetic. Modern calculators are more portable than most computers, though most PDAs are comparable in size to handheld calculators.The first solid-state electronic...
enabled him or her to perform basic computations.
In the 1970s, if the emergence of the PABX gave way to some simplification of the telephony equipment, the development of alternative display solutions, however, lead to a multiplication of the number of video monitor
Video monitor
A video monitor also called a broadcast monitor, broadcast reference monitor or just reference monitor, is a display device similar to a television set, used to monitor the output of a video-generating device, such as playout from a video server, IRD, video camera, VCR, or DVD player. It may or...
s on their desks, pieces of hardware that were specific and proprietary to their respective data provider.
Telerate, Reuters
Reuters
Reuters is a news agency headquartered in New York City. Until 2008 the Reuters news agency formed part of a British independent company, Reuters Group plc, which was also a provider of financial market data...
, Bloomberg
Bloomberg L.P.
Bloomberg L.P. is an American privately held financial software, media, and data company. Bloomberg makes up one third of the $16 billion global financial data market with estimated revenue of $6.9 billion. Bloomberg L.P...
, Knight-Ridder, Quotron, Bridge were the main actors of the financial data market, more or less specialised on the money market, foreign exchange, securities market segments, respectively, for the first three of them.
The advent of spreadsheets
From the early 1980s trading rooms multiplied and took advantage of the spread of micro-computing. SpreadsheetSpreadsheet
A spreadsheet is a computer application that simulates a paper accounting worksheet. It displays multiple cells usually in a two-dimensional matrix or grid consisting of rows and columns. Each cell contains alphanumeric text, numeric values or formulas...
s emerged, the products on offer being split between the MS-DOS
MS-DOS
MS-DOS is an operating system for x86-based personal computers. It was the most commonly used member of the DOS family of operating systems, and was the main operating system for IBM PC compatible personal computers during the 1980s to the mid 1990s, until it was gradually superseded by operating...
/Windows/PC world and the Unix
Unix
Unix is a multitasking, multi-user computer operating system originally developed in 1969 by a group of AT&T employees at Bell Labs, including Ken Thompson, Dennis Ritchie, Brian Kernighan, Douglas McIlroy, and Joe Ossanna...
world. For PC, there was Lotus 1-2-3, it was quickly superseded by Excel
Microsoft Excel
Microsoft Excel is a proprietary commercial spreadsheet application written and distributed by Microsoft for Microsoft Windows and Mac OS X. It features calculation, graphing tools, pivot tables, and a macro programming language called Visual Basic for Applications...
, for workstations and terminals
Computer terminal
A computer terminal is an electronic or electromechanical hardware device that is used for entering data into, and displaying data from, a computer or a computing system...
. For UNIX, there was Applix
Applix
Applix Inc. was a software company founded in 1983 based in Westborough, Massachusetts that published Applix TM1, a MOLAP database server, and related presentation tools, including Applix Web and Applix Executive Viewer. Together, Applix TM1, Applix Web and Applix Executive Viewer were the three...
and Wingz among others. Along video monitors, left space had to be found on desks to install a computer
Computer
A computer is a programmable machine designed to sequentially and automatically carry out a sequence of arithmetic or logical operations. The particular sequence of operations can be changed readily, allowing the computer to solve more than one kind of problem...
screen.
Quite rapidly, Excel
Microsoft Excel
Microsoft Excel is a proprietary commercial spreadsheet application written and distributed by Microsoft for Microsoft Windows and Mac OS X. It features calculation, graphing tools, pivot tables, and a macro programming language called Visual Basic for Applications...
got very popular among traders, as much as a decision support tool as a means to manage their position, and proved to be a strong factor for the choice of a Windows NT
Windows NT
Windows NT is a family of operating systems produced by Microsoft, the first version of which was released in July 1993. It was a powerful high-level-language-based, processor-independent, multiprocessing, multiuser operating system with features comparable to Unix. It was intended to complement...
platform at the expense of a Unix or VAX/VMS platform.
Though software alternatives multiplied during this decade, the trading room was suffering from a lack of interoperability
Interoperability
Interoperability is a property referring to the ability of diverse systems and organizations to work together . The term is often used in a technical systems engineering sense, or alternatively in a broad sense, taking into account social, political, and organizational factors that impact system to...
and integration. To begin with, there was scant automated transmission of trades from the front-office desktop tools, notably Excel, towards the enterprise application software that gradually got introduced in back-offices ; traders recorded their deals by filling in a form printed in a different colour depending on the direction (buy/sell or loan/borrow), and a back-office clerk came and picked piles of tickets at regular intervals, so that these could be re-captured in another system.
The digital revolution
Video display applications were not only wrapped up in cumbersome boxes, their retrieval-based display mode was no longer adapted to markets that had been gaining much liquidity and henceforth required decisions in a couple of seconds. Traders expected market data to reach them in real time, with no intervention required from them with the keyboard or the mouse, and seamlessly feed their decision support and position handling tools.The digital revolution, which started in the late 1980s, was the catalyst that helped meet these expectations. It found expression, inside the dealing room, in the installation of a digital data display system, a kind of local network. Incoming flows converged from different data providers, and these syndicated data were distributed onto traders’ desktops. One calls a feed-handler the server
Server (computing)
In the context of client-server architecture, a server is a computer program running to serve the requests of other programs, the "clients". Thus, the "server" performs some computational task on behalf of "clients"...
that acquires data from the integrator and transmits them to the local distribution system.
Reuters, with its TRIARCH 2000, Teknekron, with its TIB, Telerate with TTRS, Micrognosis with MIPS, soon shared this growing market. This infrastructure is a prerequisite to the further installation, on each desktop, of the software that acquires, displays and graphically analyses these data.
This type of software usually enables the trader to assemble the relevant information into composite pages, comprising a news panel, in text format, sliding in real time from bottom to top, a quotes panel, for instance spot rates against the US dollar, every quote update or « tick » showing up in reverse video during one or two seconds, a graphical analysis panel, with moving averages, MACD
MACD
MACD is a technical analysis indicator created by Gerald Appel in the late 1970s. It is used to spot changes in the strength, direction, momentum, and duration of a trend in a stock's price....
, candlesticks or other technical indicators, another panel that displays competitive quotes from differents brokers, etc...
Two software package
Software package (installation)
In package management systems, which are commonly used with Linux-based operating systems, a package is a specific piece of software which the system can install and uninstall....
families were belonging to this new generation of tools, one dedicated to Windows-NT platforms, the other to Unix and VMS platforms.
However Bloomberg and other, mostly domestic, providers, shunned this movement, preferring to stick to a service bureau
Application service provider
An application service provider is a business that provides computer-based services to customers over a network. Software offered using an ASP model is also sometimes called On-demand software or software as a service ....
model, where every desktop-based monitor just displays data that are stored and processed on the vendor’s premises. The approach of these providers was to enrich their database and functionalities enough so that the issue of opening up their datafeed to any spreadsheet or third-party system gets pointless.
This decade also witnessed the irruption of television inside trading-rooms. Press conferences held by central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
presidents are henceforth eagerly awaited events, where tone and gestures are decrypted. The trader has one eye on a TV set, the other on a computer screen, to watch how markets react to declarations, while having, very often, one customer over the phone. Reuters, Bloomberg, CNN
CNN
Cable News Network is a U.S. cable news channel founded in 1980 by Ted Turner. Upon its launch, CNN was the first channel to provide 24-hour television news coverage, and the first all-news television channel in the United States...
, CNBC
CNBC
CNBC is a satellite and cable television business news channel in the U.S., owned and operated by NBCUniversal. The network and its international spinoffs cover business headlines and provide live coverage of financial markets. The combined reach of CNBC and its siblings is 390 million viewers...
each propose their news channel specially dedicated to financial markets.
Internet and bandwidth
The development of the internetInternet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
triggered the fall of the cost of information, including financial information. It hit a serious blow to integrators who, like Reuters, had invested a lot the years before to deliver data en masse and in real time to the markets, but henceforth recorded a wave of terminations of their data subscriptions as well as flagging sales of their data distribution and display software licences.
Moreover, the cable operators’ investors lead to a huge growth of information capacity transport worldwide. Institutions with several trading rooms in the world took advantage of this bandwidth
Bandwidth (computing)
In computer networking and computer science, bandwidth, network bandwidth, data bandwidth, or digital bandwidth is a measure of available or consumed data communication resources expressed in bits/second or multiples of it .Note that in textbooks on wireless communications, modem data transmission,...
to link their foreign sites to their headquarters in a hub and spoke model. The emergence of technologies like Citrix supported this evolution, since they enable remote users to connect to a virtual desktop
Virtual desktop
In computing, a virtual desktop is a term used with respect to user interfaces, usually within the WIMP paradigm, to describe ways in which the size of a computer's desktop environment is expanded beyond the physical limits of the screen's real estate through the use of software, This saves space...
from where they then access headquarters applications with a level of comfort similar to that of a local user. While an investment bank previously had to roll out a software in every trading-room, it can now limit such an investment to a single site. The implementation cost of an overseas site gets reduced, mostly, to the telecoms budget.
And since the IT architecture gets simplified and centralised, it can also be outsourced. Indeed, from the last few years, the main technology providers active on the trading-rooms market have been developing hosting
Hosting
Hosting can mean:* To act as the organizer or master of ceremonies for an event.* Self-hosting - software distribution which provides all necessary source code to enable itself to be re-compiled from scratch* Internet hosting service, including:...
services.
Software equipment
From the late 1980s, worksheets have been rapidly proliferating on traders’ desktops while the head of the trading-room still had to rely on consolidated positions that lacked both real time and accuracy. The diversity of valuationValuation (finance)
In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets or on liabilities...
algorithms, the fragility of worksheets incurring the risk of loss of critical data, the mediocre response times delivered by PCs when running heavy calculations, the lack of visibility of the traders’ goings-on, have all raised the need for shared information technology, or enterprise applications as the industry later called it.
But institutions have other requirements that depend on their business, whether it is trading or investment.
Risk-management
Within the investment bank, the trading division is keen to implement synergies between desks, such as :- hedging the currency risk born from foreign exchange swaps or forward positions;
- funding by the money market desk of positions left open at end of day;
- hedging bond positions by interest-rate futures or options contracts.
Such processes require mutualisation of data.
Hence a number of package software come to the market, between 1990 and 1993 : Infinity, Summit, Kondor+
Kondor + Suite
Kondor+ is a Risk Management software package published by Thomson Reuters.Kondor+ is a market-leading trade and risk management solution which allows users to manage global trading activities on a single, flexible and extensible platform...
, Finance Kit, Front Arena, Murex and Sophis
Sophis
Sophis is an international information technology company, providing software systems to financial institutions. The company develops software solutions for the requirements of investment banks, asset managers, family offices, hedge funds, corporates and insurances...
Risque, are quickly marketed under the umbrella of « risk-management », a term more flattering though somewhat less accurate than that of « position-keeping ».
Though Infinity died, in 1996, with the dream of the « toolkit » that was expected to model any innovation a financial engineer could have designed, the other systems are still well and alive in trading-rooms. Born during the same period, they share many technical features, such as a three-tier architecture, whose back-end runs on a Unix platform, a relational database
Relational database
A relational database is a database that conforms to relational model theory. The software used in a relational database is called a relational database management system . Colloquial use of the term "relational database" may refer to the RDBMS software, or the relational database itself...
on either Sybase
Sybase
Sybase, an SAP company, is an enterprise software and services company offering software to manage, analyze, and mobilize information, using relational databases, analytics and data warehousing solutions and mobile applications development platforms....
or Oracle
Oracle Database
The Oracle Database is an object-relational database management system produced and marketed by Oracle Corporation....
, and a graphical user interface
Graphical user interface
In computing, a graphical user interface is a type of user interface that allows users to interact with electronic devices with images rather than text commands. GUIs can be used in computers, hand-held devices such as MP3 players, portable media players or gaming devices, household appliances and...
written in English, since their clients are anywhere in the world. Capture of transactions by traders, position-keeping, measure of market risk
Market risk
Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices...
s (interest-rates and foreign exchange), calculation of Profit & Loss (« P&L »), per desk or trader, control of limits set per counterparty, are the main functionalities delivered by these systems.
These functions will be later entrenched by national regulations, that tend to insist on adequate IT : in France, they are defined in 1997 in an instruction from the “Commission Bancaire” relative to internal control.
Electronic trading
Telephone, used on over-the-counterOver-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
(OTC) markets, is prone to misunderstandings. Should the two parties fail to clearly understand each other on the trade terms, it may be too late to amend the transaction once the received confirmation reveals an anomaly.
The first markets to discover electronic trading
Electronic trading
Electronic trading, sometimes called etrading, is a method of trading securities , foreign exchange or financial derivatives electronically...
are the foreign-exchange markets. Reuters creates its Reuter Monitor Dealing Service in 1981. Contreparties meet each other by the means of the screen and agree on a transaction in videotex
Videotex
Videotex was one of the earliest implementations of an "end-user information system". From the late 1970s to mid-1980s, it was used to deliver information to a user in computer-like format, typically to be displayed on a television.In a strict definition, videotex refers to systems that provide...
mode, where data are loosely structured. Its next generation product, an electronic trading platform
Electronic trading platform
In finance, an Electronic trading platform is a computer system that can be used to place orders for financial products over a network with a financial intermediary. This includes products such as shares, bonds, currencies, commodities and derivatives with a financial intermediary, such as a...
called Dealing 2000, ported on Windows, is launched in 1989. Like EBS
Electronic Broking Services
Electronic Broking Services is a wholesale electronic trading platform used to trade foreign exchange with market making banks...
, which competes with it head-on from 1997, it mostly handles spot trades.
Several products pop up in the world of electronic trading including Bloomberg Terminal
Bloomberg Terminal
The Bloomberg Terminal is a computer system provided by Bloomberg L.P. that enables financial professionals to access the Bloomberg Professional service through which users can monitor and analyze real-time financial market data movements and place trades on the electronic trading platform...
, BrokerTec
ICAP (company)
ICAP plc is a UK based voice and electronic dealer broker and provider of post trade risk services, the largest in the world carrying out transactions for financial institutions rather than private individuals...
, TradeWeb
Thomson Financial
Thomson Financial was an arm of The Thomson Corporation, which was one of the world's leading information companies, focused on providing integrated information solutions to business and professional customers...
and Reuters 3000 Xtra
Reuters 3000 Xtra
Reuters 3000 Xtra is an electronic trading platform typically used by professional traders and investment analysts in trading rooms. It provides real time streaming price date on exchange traded stocks, warrants, options, futures, indices, bonds, commodities and foreign currencies as well...
for securities and foreign exchange. While the Italian-born Telematico (MTS) finds its place, in the European trading-rooms for trading of sovereign-debt.
More recently other specialised products have come to the market, such as Swapswire, to deal interest-rate swaps, or SecFinex
SecFinex
SecFinex is a global electronic, web-based lending & borrowing trading platform based in London, the United Kingdom.- Overview :Originally known as PPA Capital Limited, the company changed its name to SecFinex, Ltd. in November, 2000....
and Equilend, to place securities loans or borrowings
Securities lending
In finance, securities lending or stock lending refers to the lending of securities by one party to another. The terms of the loan will be governed by a "Securities Lending Agreement", which requires that the borrower provides the lender with collateral, in the form of cash, government securities,...
(the borrower pays the subscription fee to the service).
However, these systems also generally lack liquidity. Contrarily to an oft-repeated prediction, electronic trading did not kill traditional inter-dealer brokerage. Besides, traders prefer to mix both modes : screen for price discovery, and voice to arrange large transactions.
Order management and routing
For organised markets products, processes are different : customer orderOrder
-Ordinality:*Collation, the sequencing and ordering of text**Alphabetical order**Lexicographical order*Order of precedence-Philosophy:* Natural order * Implicate and explicate order according to David Bohm-Science and mathematics:...
s must be collected and centralised ; some part of them can be diverted for internal matching, through so-called Alternative Trading Systems
Alternative Trading Systems
Alternative Trading Systems , are United States Securities and Exchange Commission approved non-exchange trading venues specifically designed to match buyers and sellers to find counterparties for transactions, instead of trading large blocks of shares on the normal exchange, a practice that can...
(ATS) ; orders with a large size, or on equities with poor liquidity or listed on a foreign bourse, and orders from corporate customers, whose sales contact is located in the trading-room, are preferably routed either towards brokers, or to multilateral trading facilities
Multilateral Trading Facility
A Multilateral Trading Facility is a specific type of European financial trading system. The concept was introduced within the Markets in Financial Instruments Directive , a European financial law, and describes a trading venue that brings together buyers and sellers in a non-discretionary way...
(MTF) ; the rest goes directly to the local stock exchange, where the institution is electronically connected to.
Orders are subsequently executed, partially of fully, then allocated to the respective customer accounts. The increasing number of listed products and trading venues have made it necessary to manage this order book
Order book
An order book is a businesses list of open, unshipped, customer orders, normally time-phased and valued at actual individual order prices, that may include margin and profitability analysis....
with an adequate software.
Stock exchanges and futures markets propose their own front-end system to capture and transmit orders, or possibly a programming interface, to allow member institutions to connect their order management system they developed in-house. But software publishers soon sell packages that take in charge the different communication protocols to these markets; The UK-based Fidessa
Fidessa
Fidessa Group plc is a British-headquartered company which provides software and services such as trading systems to clients in the financial services sector...
has a strong presence among LSE
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
members ; Sungard Global Trading
GL Trade
GL Trade was a French provider of financial order management and trading systems that covered front office, middle office and back office used by international financial institutions...
and the Swedish Orc Software
Orc Software
Formed in 1987 by the late Nils Nilsson and Ulrika Hagdahl, Orc Software's main activity was as a market maker on the Swedish derivatives exchange....
are its biggest competitors.
Program trading
In program trading, orders are generated by a software program instead of being placed by a trader taking a decision. More recently, it is rather called “algorithmic trading ». It applies only to organised markets, where transactions do not depend on a negotiation with a given counterparty.A typical usage of program trading is to generate buy or sell orders on a given stock as soon as its price reaches a given threshold, upwards or downwards. A wave of « stop » sell orders has been largely incriminated, during the 1987 financial crises, as the main cause of acceleration of the fall in prices. However, program trading has not stopped developing, since then, particularly with the boom of ETFs
Exchange-traded fund
An exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE...
, mutual funds mimicking a stock-exchange index, and with the growth of structured asset management ; an ETF replicating the FTSE 100 index, for instance, sends multiples of 100 buy orders, or of as many sell orders, every day, depending on whether the fund records a net incoming or outgoing subscription flow. Such a combination of orders is also called a “basket”. Moreover, whenever the weight of any constituent stock in the index changes, for example following an equity capital increase, by the issuer, new basket orders should be generated so that the new portfolio distribution still reflects that of the index. If a program can generate more rapidly than a single trader a huge quantity of orders, it also requires monitoring by a financial engineer, who adapts its program both to the evolution of the market and, now, to requirements of the banking regulator
Bank regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things...
checking that it entails no market manipulation
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...
. Some trading-rooms may now have as many financial engineers as traders.
The spread of program trading variants, many of which apply similar techniques, leads their designers to seek a competitive advantage by investing in hardware that adds computing capacity or by adapting their software code to multi-threading
Thread (computer science)
In computer science, a thread of execution is the smallest unit of processing that can be scheduled by an operating system. The implementation of threads and processes differs from one operating system to another, but in most cases, a thread is contained inside a process...
, so as to ensure their orders reach the central order book before their competitors’. The success of an algorithm
Algorithm
In mathematics and computer science, an algorithm is an effective method expressed as a finite list of well-defined instructions for calculating a function. Algorithms are used for calculation, data processing, and automated reasoning...
therefore measures up to a couple of milliseconds.
This type of program trading, also called high-frequency trading
High-frequency trading
High-frequency trading is the use of sophisticated technological tools to trade securities like stocks or options, and is typically characterized by several distinguishing features:...
, conflicts however with the fairness principle between investors, and some regulators consider forbidding it
.
Portfolio management
With order executions coming back, the mutual fund’s manager as well the investment bank’s trader must update their positions. However, the manager does not need to revalue his in real time: as opposed to the trader whose time horizon is the day, the portfolio manager has a medium to long term perspective. Still, the manager needs to check that whatever he sells is available on his custodial account; he also needs a benchmarking functionality, whereby he may track his portfolio performance with that of his benchmarkBenchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost...
; should it diverge by too much, he would need a mechanism to rebalance it by generating automatically a number of buys and sells so that the portfolio distribution gets back to the benchmark’s.
Another software family, that of asset management, meets such kind of requirements.
Bloomberg, Decalog, Apollo, Triple A, Sophis Value, SimCorp
SimCorp
SimCorp is a Danish company that provides specialised software and financial expertise for the investment management industry. Its clients include banks and central banks, mortgage lenders, portfolio/investment managers, insurance companies, pension funds, mutual funds, securities and commodities...
, are the main actors of this market.
Relations with the back-office
In most countries the banking regulation requires a principle of independence between front-office and back-office: a deal made by the trading-room must be validated by the back-office to be subsequently confirmed to the counterparty, to be settled, and accounted for. Both services must report to divisions that are independent from each at the highest possible level in the hierarchy.
In Germany, the regulation goes further, a "four eyes’ principle" requiring that every negotiation carried by any trader should be seen by another trader before being submitted to the back-office.
In Continental Europe, institutions have been stressing, since the early 1990s, on Straight Through Processing
Straight Through Processing
Straight-through processing enables the entire trade process for capital markets and payment transactions to be conducted electronically without the need for re-keying or manual intervention, subject to legal and regulatory restrictions...
(STP), that is, automation of trade transmission to the back-office. Their aim is to raise productivity of back-office staff, by replacing trade re-capture by a validation process. Publishers of risk-management or asset-management software meet this expectation either by adding back-office functionalities within their system, hitherto dedicated to the front-office, or by developing their connectivity, to ease integration of trades into a proper back-office-oriented package.
Anglo-Saxon institutions, with fewer constraints in hiring additional staff in back-offices, have a less pressing need to automate and develop such interfaces only a few years later.
On securities markets, institutional reforms, aiming at reducing the settlement lag from a typical 3 business days, to one day or even zero day, can be a strong driver to automate data processes.
As long as front-office and back-offices run separately, traders most reluctant to capture their deals by themselves in the front-office system, which they naturally find more cumbersome than a spreadsheet, are tempted to discard themselves towards an assistant or a middle-office clerk. An STP policy is then an indirect means to compel traders to capture on their own. Moreover, IT-based trade-capture, in the shortest time from actual negotiation, is growingly seen, over the years, as a “best practice” or even a rule.
Anatomy of the biggest failures
Whether as an actor or as a simple witness, the trading-room is the place that experiences any failure serious enough to put the company’s existence at stake.In the case of Northern Rock
Northern Rock
Northern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007. Having failed to find a commercial buyer for...
, Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
or Lehman Brothers
Bankruptcy of Lehman Brothers
Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. The bankruptcy of Lehman Brothers remains the largest bankruptcy filing in U.S...
, all three wiped out by the subprime crisis, in 2008, if the trading-room finally could not find counterparts on the money market to refinance itself, and therefore had to face a liquidity crisis
Liquidity crisis
In financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...
, each of those defaults is due to the company’s business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
, not to a dysfunction of its trading-room.
On the contrary, in the examples shown below, if the failure has always been precipitated by market adverse conditions, it also has an operational cause :
| Month Year | Company | Fictitious trades | Hidden positions | Overshot positions | Insider trading Insider trading Insider trading is the trading of a corporation's stock or other securities by individuals with potential access to non-public information about the company... |
Market manipulation | Miscalculated risk | Erroneous valuation | Lack of trader control | Inadequate entitlement | Capture error | Conse- quences on the company |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Apr. 87 | Merrill Lynch Merrill Lynch Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York... |
|b | b | b | ||||||||
| Feb. 90 | Drexel Burnham Lambert Drexel Burnham Lambert Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the... |
b | b | b | fine and bankruptcy | |||||||
| Sep. 91 | Salomon Brothers Salomon Brothers Salomon Brothers was a bulge bracket, Wall Street investment bank. Founded in 1910 by three brothers along with a clerk named Ben Levy, it remained a partnership until the early 1980s, when it was acquired by the commodity trading firm Phibro Corporation and then became Salomon Inc. Eventually... |
b | fine | |||||||||
| Feb. 95 | Barings | b | b | b | bankruptcy | |||||||
| Apr. 95 | Kidder Peabody | b | b | |||||||||
| Jul. 95 | Daiwa Daiwa Daiwa may refer to:Places:*Daiwa, Hiroshima, a former town in Kamo District, Hiroshima, Japan*Daiwa, Shimane, a former village in Ōchi District, Shimane, JapanCompanies and related:*Daiwa Securities Group, a Japanese security brokerage... |
b | b | b | partial business closure | |||||||
| Juin 96 | Sumitomo | b | b | b | b | fines + civil lawsuit | ||||||
| Jan. 98 | UBS | b | b | |||||||||
| Sep. 98 | LTCM | b | recapitalisation | |||||||||
| Dec. 05 | Mizuho Securities Mizuho Mizuho may refer to:* Mizuho, Gifu, a city in Gifu* Mizuho, Tokyo, a town in Tokyo* Japanese seaplane carrier Mizuho, a Japanese seaplane carrier* Mizuho , a train service in Japan* Mizuho Station * 2090 Mizuho, an asteroid... |
b | | | |||||||||
| Sep. 06 | Amaranth Advisors Amaranth Advisors Amaranth Advisors LLC was an American investment adviser managing multi-strategy hedge fund founded by Nicholas Maounis and headquartered in Greenwich, Connecticut. The firm had up to $9 billion in assets under management and collapsed in September 2006 after losing in excess of $5 billion on... |
b | ||||||||||
| Jan. 08 | Société Générale Société Générale Société Générale S.A. is a large European Bank and a major Financial Services company that has a substantial global presence. Its registered office is on Boulevard Haussmann in the 9th arrondissement of Paris, while its head office is in the Tours Société Générale in the business district of La... |
b | b | b | b | fine | ||||||
| Feb. 08 | Crédit suisse | b | ||||||||||
| May 8 | Morgan Stanley Morgan Stanley Morgan Stanley is a global financial services firm headquartered in New York City serving a diversified group of corporations, governments, financial institutions, and individuals. Morgan Stanley also operates in 36 countries around the world, with over 600 offices and a workforce of over 60,000.... |
b | b | b | fine | |||||||
| Oct. 08 | CITIC Pacific CITIC Pacific CITIC Pacific is a Hong Kong-based conglomerate holding company headquartered in the CITIC Tower, Admiralty, Hong Kong. It is 58% owned by the state-owned Citic Group in Beijing and has shareholders around the world.-Business areas:... |
b | b |
These operational causes, in the above columns, are due to organisational or IT flaws :
- A fictitious trade gets possible whenever the system allows to post a trade to either a fictitious counterparty, or to a real counterparty, but for which the system sends neither a confirmation to that counterparty nor an automated message to the back-office, for settlement and accounting ;
- Hidden position, which are fraudulent, and excess over authorized positions, which is not, are also made possible by the absence of a mechanism of limits control with transmission of a warning to the Risk Department, or by the absence of reaction by the recipient of such a warning ;
- Some insider trading cases can be explained by the proximity, inside the trading-rrom, of desks with conflicting interests, such as the one that arranges equity issues with that invests on behalf of customers.
- Price manipulation is also possible if no control is made on the share of an instrument that is held in relation to the total outstanding on the market, whether this outstanding is the total number of stocks of a given corporate issuer, or is the open position of a listed derivative instrument ;
- Risk can be miscalculated, because it depends on parameters whose quality cannot be assessed, or because excessive confidence is put in the mathematical model that is used ;
- An erroneous valuation may stem from a fraudulent handling of reference prices, or because the lack of fresh quotations on an instrument, and the failure to consider an alternative, model-based, valuation, have led to the use of obsolete prices ;
- The lack of trader’s control can be assessed by the weakness of the reporting required from him, or by the lack of expertise or critique by the recipients of this reporting ;
- A user entitlement may prove inadequate, either because it is granted by the hierarchy in contradiction with the industry’s best practices, or because, though not granted, it is still enforced either because the system cannot manage it or because, by neglect, it has not been properly set up in that system ;
- Finally, a capture error may arise in a system with weak plausibility controls, such as that on a trade size, or with no « four eyes principle » mechanism, whereby a manifest anomaly would have been detected and stopped by a second person.
Destroyed rooms
- On May 5, 1996, during a Saturday to Sunday night, a fire, suspected to be criminal, ravaged the trading-room of Crédit Lyonnais ; trading businesses have been transferred in a couple of days to a backup, or disaster recovery, site, in outer Paris.
- On September 11, 2001, the attack against the World Trade CenterWorld Trade CenterThe original World Trade Center was a complex with seven buildings featuring landmark twin towers in Lower Manhattan, New York City, United States. The complex opened on April 4, 1973, and was destroyed in 2001 during the September 11 attacks. The site is currently being rebuilt with five new...
destroyed the Cantor Fitzgerald’s trading-room and killed 658 persons, two-thirds of its workforce. Yet business resumed about one week later.
Trading-room and gambling
Trading rooms are also used in the sports gamblingGambling
Gambling is the wagering of money or something of material value on an event with an uncertain outcome with the primary intent of winning additional money and/or material goods...
sector. The term is often used to refer to the liabilities and odds setting departments of bookmakers where liabilities are managed and odds are adjusted. Examples include internet bookmakers based in the Caribbean and also legal bookmaking operations in the United Kingdom such as William Hill
William Hill (bookmaker)
William Hill plc is one of the largest bookmakers in the United Kingdom. Its headquarters is in the north London suburb of Wood Green and in Leeds, West Yorkshire. It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.-History:...
, Ladbrokes
Ladbrokes
Ladbrokes plc is a British based gambling company. It is based in Rayners Lane in Harrow, London owned by Bhavin Kakaiya. From 14 May 1999 to 23 February 2006, when it owned the Hilton hotel brand outside the United States, it was known as Hilton Group plc...
and Coral which operate trading rooms to manage their risk. The growth of betting exchanges such as Betfair has also led to the emergence of "trading rooms" designed for professional gamblers. (reference: Racing Post newspaper 19/7/07) The first such establishment was opened in Edinburgh in 2003 but later folded. Professional gamblers typically pay a daily "seat" fee of around £30 per day for the use of IT facilities and sports satellite feeds used for betting purposes. Today there are eight such trading rooms across the UK, with two based in London - one in Highgate
Highgate
Highgate is an area of North London on the north-eastern corner of Hampstead Heath.Highgate is one of the most expensive London suburbs in which to live. It has an active conservation body, the Highgate Society, to protect its character....
and one in Canary Wharf.
See also
- SecuritySecuritySecurity is the degree of protection against danger, damage, loss, and crime. Security as a form of protection are structures and processes that provide or improve security as a condition. The Institute for Security and Open Methodologies in the OSSTMM 3 defines security as "a form of protection...
- Regulation NMSRegulation NMSRegulation NMS is a regulation promulgated and described by the United States Securities and Exchange Commission as "a series of initiatives designed to modernize and strengthen the national market system for equity securities." It was established in 2007...