When I went to Lehman in 1986, it was the dawn of the UNIX trading system as Lehman, Salomon, Morgan Stanley and others went head-to-head developing front-office order management systems for virtually every business line. It was a time when Steve Jobs would even come to Wall Street to pitch his latest and greatest devices. The time I was lucky enough to sit in on a Steve Jobs demo, it was for the Next Cube (which would become the core of Apple OS). It was, as we say up here in Boston, wicked cool.
From the mid-90s, it became a blur.
The Internet boom spawned the rise of online brokerages, which broke the high commission model and drove innovation in wealth management and fixed-fee brokerage. Online brokerage and the Order Handling Rules kicked off the ECN wars, which, when institutionalized in the early 00s, started the push for direct market access, smart order routing, buy-side algorithmic trading, dark pools, execution management platforms, post and then pre-trade transaction cost analysis and finally high frequency trading. None of these innovations, I would guess, were ever imagined even three years before they went mainstream.
While these transitions dislocated hundreds if not thousands of people, they also increasingly brought the best business – and technology – minds in the world to New York, London and Tokyo. Here they would work for firms where the only barriers to success were their imaginations. Even budget was not much of a barrier when competitive pressures aligned.
Increasingly, even major horizontal technology firms began using financial markets firms as product incubators. Today, for example, there are a number of hard-core technology firms focused on the movement, routing, parsing, and analysis of high-speed, low-latency messages, as messaging flow for U.S. exchanges passes a one second peak load of over 3.7 million messages. This number is up from a peak of only 5,000 messages just 10 years ago. What’s more, that growth shows no sign of abating.
So why are hardware firms interested in solving such a niche problem?
Well to begin with, financial markets firms have no lack of money when it comes to being first. That helps. But second, and more realistically, as the number of processors on a core increases, and chip/server costs decrease, the amount of data will skyrocket. And with more data created, there will be an increasing need to parse, analyze and act on this data in real-time.
Just think of the solutions that could be created by harnessing the geospatial data from cell phones for determining traffic patterns, or using RFID for managing the global supply chain, or for that matter employing real-time logistical information to develop auto-piloting for automobiles. All of these solutions will be based upon the data management innovation that is being done in the securities industry.
Now why am I writing this commentary on innovation?
TabbFORUM is kicking off a new initiative called the TabbFORUM Spotlight Series. The Spotlight Series will be periodic commentaries, videos, and analysis on various topics that TabbFORUM editors find of particular interest within our community. The first of these series is on Innovations in Trading and Technology. The TabbFORUM Innovation Spotlight Series will solicit, attract, and spotlight ideas, thoughts, technologies and people that TabbFORUM feels have, and or will greatly influence, our industry and community.
And with that, we would like to both kick off our first Spotlight Series and thank NYSE Technologies for so graciously sponsoring this initiative and enabling us to provide you with insight and some clarity on Innovation in Trading and Technology.
Innovations in Trading and Technology (
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2 Comments to "Financial Innovation – Not an Oxymoron ":
tomtabb
29 September 2010
Larry makes excellent points, as usual, to contend that the financial markets industry has pioneered breakthrough technology and actually deployed it to generate revenue and create jobs. Just to mention a a little history and a few additional things - how about IBM back in the late60's showing the way on the idea of "solutions." We at IBM, were busy servicing customers and at the same time developing requirements, needs, and specifications for a business architecture called "BASE" Brokerage Accounting System. This was IBM's solution architecture - back office, but nevertheless pretty cutting edge for 1969 among all the big iron vendors like RCA, CDC, and Honeywell, IBM was selling solutions in the industry. By the way, Lehman Brothers was an account of mine and had RCA Spectra 40s, but the sign on the door was "IBM Room." They were ordering 360s because IBM had solutions. I remember in 1976, a customer of mine at a firm called Dean Witter, told me he could buy my software to help him build better COBOL applications when the New York Stock Exchange volume exceeded 16 million shares. It exceeded that year, and DW bought the software and innovated their applications as did dozens of other firms. Then don't forget the FX systems and BIS Banking software and Kapiti automating the global currency trading of every firm in the world. I can tell you from being with BIS in Tokyo for two years in the 80s, that FX and Money Marketing trading software was very innovative and front, middle, and back office folks used it. “Integrated transaction processing” , pretty revolutionary stuff for 1983. Later in the 80s, derivatives - futures, options, and swaps technologies changing the global landscape and figuring out how to use technology to compute/price, order, and process complex trades at the time. What other industry globalized a complex activity at that time? Who can forget the Quantex rules based (hardware and logic engine) system and Bill the program trading guru doing the huge volume of program trades on the big board with an if/then logic engine that he built that later became the prototype for firms like Susquehanna. More on being innovative in the industry would have to include Cedel and Euroclear and its members (the global banking industry) having the vision to recognize the industry efficiency and service of building "the bridge." That's innovation. Then, let’s not forget Harvey Houtkin, rest his soul, leading the army of day traders using technology and innovative rules to pick off trades in the middle of fat spreads and leading to wiping out market makers as we knew them. How about FIX protocol – what other industry innovated universal global trading standards at that time? There were Commerce Ones and Aribas in the ERP world, but they couldn’t make it happen in that unified a way. No other industry that I can think of collectively (customers and vendors together) utilized technology as an industry initiative like financial markets to increase efficiency and market driven competition. The complex management of data for the future is a worthy point and technology will play a big role and financial markets will innovate. It's been fun thinking about stuff I never thought of at the time as being anything other than innovation, but sometimes we forget. Tom Ricciardi
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louislovas
30 September 2010
Larry, I believe you are correct in stating the general public views companies link Google, Apple and the BioGen firms as the innovators in the world. But most of the technology they create is also geared for the consuming masses - thus the notoriety. From a personal perspective, I have had the good fortune in my 25+ years to have worked in many industries, while most have been in financial services I've also been involved with manufacturing and insurance. I would contend in most other industries, IT dollars spent is focused on cost containment - not profitability. As such innovation is a difference in kind vs. a difference in degree. Manufacturing firms look at IT innovation through deployment of standards-based platforms for long-term vendor-neutral assurance. Technology only reaches industry-accepted standards (think SQL92) only after it's reached a deep level of maturity (think years). As viewed from the financial service (i.e. Cap Markets) perspective this is a death-sentence. Innovation in trading systems from high-speed networks, tools for rapid development/deployment of trading algo's to high speed tick databases and all those other things you've mentioned in your article are the norm. Investment firms have little interest (or patience) for technology that provides them with no 'edge' over their competition. Innovation "is" the driving force in financial services more than most other industries... by far. And I for one am grateful for that.
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