Execution Analytics: Real-Time
Challenges and Directions in
Institutional Trading Dushyant Shahrawat, Senior Research Director Capital Markets, TowerGroup June 2011 Executive Summary The importance of complex event processing (CEP) in securities trading is rapidly expanding. New use cases for real-time analysis of multiple, complicated data and information streams - the essence of CEP - will penetrate more parts of the transaction lifecycle. One area in which TowerGroup expects to see the greatest increase of CEP is execution analytics. Execution analytics, a cousin to transaction cost analysis (TCA), is the process by which a trade is analyzed while it is being worked. This real-time analysis has as its goal the creation of actionable information that may result in changes to an order such as adjustment of parameters on an algorithm, a change of strategy selection, or even cancellation of the order. This form of live feedback requires a technology platform that enables the rapid absorption, filtering, and analysis of multiple types of data. Complex event processing is the technology that enables such analysis. The live feedback determines where liquidity is resident and where a trade is experiencing slippage against its benchmark, so that an appropriate response can be triggered. One of the key benefits of CEP is improvement in execution quality. In addition, the broker dealer that offers CEP-based execution analysis is providing a higher level of client service than its peers. Over the next 3 years, TowerGroup expects that execution analytics will become standard practice. For now, however, such an approach is a strategic differentiator that can be used to attract incremental order flow from the buy-side. This paper looks at real-time analytics and CEP in securities trading in the context of the critical roles they play in the management of diverse data sets and other inputs in the institutional trading process. It describes some of the data analysis challenges traders face in the evolving high frequency, multi-asset, global trading world, and then offers a view of the expected future state of the business. Lastly, it offers prescriptions and lessons from leading firms regarding the means they are employing to successfully master an increasingly fast-paced and complex trading environment.
TowerGroup Research is available on the Internet at www.towergroup.com ? 2011 Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved. Execution Analytics: Real-Time Challenges and Directions Analyzing Analytics The market for real-time data and data analysis is rapidly expanding in securities trading - not just in the number of users but, more importantly, in the number of uses. The evolution is perhaps not all that surprising: the first applications of CEP in capital markets were in the trade execution process (for example, dynamically updating smart order routers), and it was only a matter of time before new ones were discovered, such as to analyze the impact of news on stock price movements. The execution story has of course not been completed yet. Broker dealers and the buy side will constantly tinker with their algorithms to implement new trading strategies and move into new asset classes, including bonds, FX, and derivatives. Each of these instruments will require new versions of pre- and during-the-trade data intake and assessment, such as yield curve or prepayments impacts. But there are other approaches that are being introduced today, such as compliance and risk management, or are mere ideas that won't become mainstream for a few years, e.g., harvesting and integration of sentiment from social media. Progressive firms, those looking to gain an edge, will embrace these new uses. Analytics covers a wide range of activities, from pre-trade credit checks to post-trade exposure management. The means exist to produce these types of analytics today, but they are oftentimes inadequate to the demands increasingly being placed on securities firms from regulation, heightened risk management concerns, and overall trading business decision-making. Particularly counterparty credit risk management, of which analytics is a key component, will be a critical con... [download for more]