A common fault amongst generals is to become experts at fighting the last war, often ignoring what they need to consider in order to fight the next one. A question worth asking is, ‘are the exchanges and the co-location specialists involved in an arms race
to tackle latency, but missing where the real battle for high-frequency trading will be fought next?
Responding with ever more sophisticated mechanisms for making high speed arbitrage interventions across multiple trading venues may appear rewarding at first glance. But, becoming ever better at this may be like focusing on firing arrows when the enemy is investing
in machine guns and tanks.
It might sound old fashioned but a new force in the next war may be a spotlight on run-the-bank operations using the familiar concept of the IT Infrastructure Library (ITIL) as a service framework. This approach enables financial institutions to re-focus
their IT operations around the services that are being delivered to business users, rather than concentrating on the individual technologies and infrastructures supporting the business. These microsecond timing improvements will often move the pinch point
on but still leave gaping problems when it comes to managing exposure and risk on a real-time basis.
With high-frequency trading leading to lower margins per trade, gaining a service view of costs and profitability will be a crucial tactic if firms want to avoid the costly build-up of unbalanced technology infrastructures. Regrouping IT operations into
run-the-bank service teams, using an ITIL framework, helps firms to:
· eliminate redundant IT capacity introduced with mergers and acquisitions
· gain control of co-location data centres and bring their operational metrics into an end-to-end service view of performance
· evaluate the value and costs involved in providing infrastructure to support each line-of-business trading activity
· merge discrete service management processes using a common language
Implementing this approach will improve operational performance by business or service line. Yet, to do this firms need to acquire a range of interrelated real-time technology and business service metrics from their trading and risk applications, infrastructure
elements and co-located trading platforms. This can then be turned into business intelligence for use at multiple levels within the firm. Firms can then determine where best to invest valuable operational and technology resource. They will also identify whether
it’s really profitable to chase microsecond trade execution capability without being in a position to confidently ensure that some rogue trading process isn’t accidentally flooding the exchange with cancel / replace orders for trades that had never actually
been sent. That in turn can rapidly demolish the hard earned profit margins gained from participating in high volume low latency trading.
To better fight the next war it is critical to understand what trading and risk management processes need to be improved, concentrating only on trimming latency on trade execution might interesting from a technology viewpoint but risky from a business perspective.