What better reason than a historic week of intense market volatility to make us pause and spend some time on a favorite topic of brokers, fund managers and researchers alike… data analytics. Real-Time streaming analytics, to be precise.
The calm waters that had existed for months on Wall Street came to an abrupt end last week, as we witnessed the worst market losses since February, which led us to look at the role real-time streaming analytics plays in protecting positions and managing risk and liquidity. We wanted to take it a step further and outline some key similarities and differences in the way the buy side and sell side leverage real-time analytics, and what each should consider most valuable in a volatile market.
This is the first of a four-part series where we’ll dig in to three key areas of capital markets – the buy side, the sell side and exchanges – to examine how streaming data enrichment, performance metric calculations, and anomaly alerts are delivering better, faster data intelligence to meet the needs of regulatory, profitability and customer service pressures.
Below is an overview of key areas where real-time analytics are delivering the most value in times of volatility:
Sell Side – Sell side firms like investment banks, commercial banks, and brokers have the most consistent needs for live streaming analytics and it makes sense. They’re under the most regulated pressure, which has continued to increase in recent years. They’re also under the greatest cost pressures, because while the amounts they can charge have decreased, the requirement to provide the best pricing and improved transparency in trading effectiveness to customers has increased.
What’s vital to the sell side is having the ability to identify problems, while they can still take remedial action. If you process two orders with two different brokers and something goes wrong with the trade, you’ll be much happier with the broker who calls you within minutes with the insight, as opposed to the broker who is merely able to run end-of-day reports, which are typically files directly to trash. All banks have similar services, to the point where it’s almost commoditized. What they bring to the table is in their talent, expertise and their information assets. The ability to gain and leverage insights in real time is an incredibly valuable differentiator. Sell side firms need to know fast and accurate information about what their position is now, where the risks are and where the problems are. By the end of the day, it’s too late.
Buy Side –The large traditional fund managers have slightly different, yet equally important needs for real-time streaming data. Here, customers on the trading desk are sending orders to brokers who must make critical decisions before and during the trade, which requires continuous feedback on how the trade is performing. But there’s more that real-time intelligence can deliver. For instance, fund managers are routinely evaluating broker performance, evaluating algorithms, and which brokers are implementing the best strategies. Real-time intelligence from streaming data allows managers to monitor from a higher viewpoint to investigate how they can optimize their performance, better understand what drove prior performance and how they can reduce the weighting of certain instruments while increasing the weighting of others.
A fund manager may we willing to take on more risk for that extra 3% of return, but without real-time intelligence, it’s difficult to properly change modeling parameters to rebalance a portfolio for peak performance. As someone once said, you wouldn’t decide to cross a busy street based on a picture of that crosswalk taken yesterday.
Exchanges / DPMs: Exchanges, for many years were thought of as a monopoly. If you wanted to trade a stock, you traded on that exchange. But today, if you want to trade a stock, it can be done in a multitude of ways, both lit and dark.
From the exchange’s perspective, competitive pressures are driving a clear need for faster insights on how they, their members, and competitors are performing in real time. Say a market maker puts an order into the book. One may place a few orders in throughout the day and adjust as the market moves. But others may place tens of thousands of orders and keep replacing them throughout the day. Real-time streaming intelligence will help them better understand why one is really contributing to liquidity, and which is playing the exchange for riskless stipends. Once you can visualize this data, you’ll be more equipped to investigate trading flow, and understand market quality, together with the latency for each market participant. The fact is, exchange must provide market health, but they also need to move fast. If one is slowed by the inability to interpret data, and optimize their flow into and matching engine execution, then brokers will have no problem taking their business to another competing exchange, resulting in lost revenue. Although the same equally applies to surveillance, the focus is on optimizing performance, and member flow.
In short, real-time streaming analytics shows you the anomalies; the weird stuff where there is an edge. For if everything went as expected, there is nothing to analyze. But in the real world there are always issues to resolve and opportunities to capitalize on.
In our next blog well explore some of those issues and opportunities more closely, as we dig deeper into the sell side, and the regulations that are driving the evolution of real time insight.
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- Guarding Your Blind Side on the Buy Side: The Promise of Real-Time Analytics - March 18, 2019
- Using Kafka Streams to Analyze Live Trading Activity for Crypto Exchanges - February 23, 2019