Trade secrets

Simplifying some of the most difficult software challenges, Event Stream Processing (ESP) technology is proving invaluable for financial institutions, enabling them to manage and analyze event stream data in real-time. And, as we found out in an exclusive interview with John Bates, VP Products, ESP, at leading firm Progress Software, there are considerable benefits to be reaped from acting fast.

FST. What is it about ESP technology that makes it so attractive to the financial services market?
JB. If we take the Progress Apama ESP technology as an example, it has three main elements. At the heart of the technology is a processing engine, the correlator. This enables financial institutions to feed in real-time information, news, etc., and inject real-time trading strategies for best execution, providing them with the ability to manage multiple trade execution strategies, and thus to build a competitive advantage in the market.

In addition, as the user can take in multiple feeds from different asset classes, they are able to do cross asset class trading. However, rather than being in the form of a traditional database query, where you would say what happened in the past, this is all about what’s happening now and what has happened, and analyzing those patterns over time. For example, you might want to know when news articles relating to items in your stock portfolio arise, followed by a fall or rise of greater than about five percent in the value of that stock. And if that occurs, you may then want to alert a trader or automatically trade on that stock. Alternatively, you might want to monitor a spread trading scenario – to tell you when the spread between two instruments, such as Microsoft and Oracle exceeds a certain level, and in that case to buy one and sell the other.

There are an infinite number of strategies that people want to develop but they all require the right environment in which to host them. That environment will monitor the market data, make trading decisions in sub-millisecond latency based on that strategy and place orders in the market accordingly.

The second thing to consider is how you plug that into the market. We provide an integration adapter framework that enables the correlator to plug into any market data feed, asset class, order management system or database, meaning you can utilize the environment you have and that you’re used to.

Finally, and what we’ve found to be one of the most important features recently, is the graphical modeling environment that we provide, called Event Modeler. This enables business users to create and modify strategies themselves without having to go to a programming group. Users want to quickly spot new patterns in the market and to create strategies to capitalize on them. While traditional models tend to involve an army of developers who will build it over weeks or months, the Event Modeler enables you to do it in days.

More recently, we’ve also added an event store, which enables the user to capture market data and store it in chronological order. This can then be used to back-test your strategies, as well as keeping audit trails of all your activities. Lastly, there is the Dashboard Studio, which lets you link a rich graphical dashboard to your strategies enabling you to plot what’s going on in the market in real-time.

FST. I understand it is also very advantageous in terms of developing the algorithm itself?
JB. Exactly, you can put together a new algorithm very quickly using re-usuable building blocks, but you can also take an existing algorithm and change it. Using the EventStore product it is possible to test that strategy by back-testing it, seeing how it performs under different conditions, and then to evolve that strategy to make it as profitable as possible.

FST. And aside from pure trading applications, are you seeing any additional areas in which financial institutions are leveraging this technology?
JB. Certainly, we have a number of customers who are using this technology for risk management, for example, in foreign exchange. People are receiving their deal flow, managing all their positions for multi-currency crosses, and then calculating the Value at Risk in those positions in real-time as each deal comes in. This enables them to respond automatically when certain risk thresholds are breached, auto-hedging those positions by buying and selling currency crosses in order to return them to a risk neutral position. That’s one area of risk management, but we also have customers using it in equities, futures, etc.

Another area that the technology is making an impact is in surveillance and compliance. Regulatory authorities and banks, for example, are now able to spot anomalous trading patterns in the market in real time and act against them before they move the market.

FST. This ability to react as quickly to change as possible must be critical to the overall profitability of financial institutions...
JB. Absolutely. And also on the topic of compliance, there is another emerging issue both in Europe with MiFID and in the US with Reg NMS. An important element of both is the need to demonstrate to your clients that you have offered best execution. To do that that you have to be able to monitor multiple liquidity pools in real time to see what is being offered in those pools and also to be able to record that information.

In fact, this technology has real relevance to any area where you need to be able to spot risk and react to it. There are a growing number of applications where it is becoming very important, especially where trading in milliseconds makes a critical difference, particularly in trade and risk.

FST. What advice would you give to our readers looking to adopt ESP technology – is it easy to implement?
JB. The first stage is integration and we have a large number of pre-built adapters to enable fast implementation, while it is also very easy to build new adapters to fit to your existing feed. The same goes for strategies – we have out-of–the box strategies that you can use right away, but you can also build your own very rapidly. We’re all about rapid execution and rapid deployment.

When it comes to implementation, you have to consider that building the kind of strategies we’ve talked about on your own is extremely time-consuming using traditional technologies. ESP provides an accelerated way of doing this with a more fit-for-purpose paradigm. Whereas most vendors offer a fixed black box you have no ability to know what’s going on inside those boxes or to change them so the ability to customize strategy is clearly a competitive advantage.

In profile: John Bates
As vice president of Apama products for event processing at Progress Software, Bates is responsible for leading the team in the design and development of the company’s event processing products.

Prior to joining Progress, Bates was the co-founder, President and CTO of Apama, a pioneering event processing software vendor acquired by Progress in April 2005. He led Apama’s technology strategy and is a co-inventor of Apama's patented technology, now a key part of Progress’ event processing platform.

Defining Event Stream Processing (ESP)
Software technology that allows applications to monitor streams of event data, analyze those events, and act upon opportunities and threats in real time. ESP systems often utilize, or include, event databases and event visualization tools. Complex event processing, or CEP, is a key element of ESP that provides language elements that allows applications to express the complex patterns among events it's looking for. CEP provides constructs that include event abstraction, event hierarchies, and the ability to express relationships between events such as causality, membership, and timing. (Source: www.eventstreamprocessing.com)