ES03-008

The continuing acceleration of the markets and proliferation of sophisticated and complex trading strategies, as well as the constant cost pressures on brokers, investment managers, hedge funds and custodians to be more efficient and competitive, is propelling the industry to embrace real-time technology that measures and manages trade metrics.

Market data is moving at 70,000 ticks per second, Electronic Communications Networks (ECNs) and exchange matching models are linking buyers and sellers at rates of 5 milliseconds and less, and no- and low-touch institutional buy-side order flow has reached 31% while topping 45% for hedge funds.

TABB Group estimates that electronically routed buy-side orders will increase from approximately 1.2 billion shares a day in 2004 to more than 3.1 billion shares per day in 2007. This increase does not take into consideration the adoption of the NYSE Hybrid market, which by some estimates could double or triple listed volumes and further accelerate the move away from traditional channels.

The question is: How will firms manage all this new responsibility, lower their cost structures, increase their efficiency, and, in some cases, develop new value propositions? The answer begins with sound management practices based on precise, updated and up-to-the minute information that’s only available through real-time measuring.

Firms need not only to better measure and manage their infrastructure but also to better monitor their electronic trading logic. They need dashboards and throttles to ensure that not only the proper work is being performed at the right time, within the designated constraints, and in line with stated goals, but also that the proper trading models are employed and performing as anticipated.

Measurement must start where processes are the most critical and have the lowest tolerances. If a process takes a week, speeding it up by a minute is not significant. However, if an order takes a second to generate, cutting its time in half may be critical. Without measurement technology, service level definitions, and management oversight, the organization will never know, either of the problem or the solution. The increasingly automated execution landscape requires a flexible and extensible electronic trading measurement and management facility. As brokers develop and extend electronic channels to their clients, the broker / client relationship radically changes.

The automation of trading flow provides less transparency into the trading process so metrics need to be implemented to ensure that models do not go astray. The more order flow is automated, the more the buy-side firms will leverage statistics to choose their brokers, leaving technologically disadvantaged firms with fewer orders. More advanced firms will use their statistics to not only improve their electronic trading models and processes, but as a marketing tool to further increase adoption.

Not only will sell-side firms extend their use of measuring technology, but buy-side firms will also become adopters as they become hands-on in the trading process.

TABB Group believes that metrics management will be one of the key technologies as we move further into an electronic future; for without a score card it will be difficult not only to declare the winners, but to successfully manage a trading desk, or for that matter, a modern financial organization.

As this market develops, a critical component of this technology will be integration. The successful technology will be easily integrated and deployed into the OMS, FIX engines, connectivity providers, market infrastructures and trading technology. The pivotal factor for this technology will be flexibility, as new execution models, trading venues, technologies, and customers will all need customized services within a very dynamic environment.

TABB Group Report on Measuring and Managing Trade Metrics at Light Speed

This report discusses the growing need for firms to extend real-time measuring and managing trading applications beyond monitoring their infrastructure and connectivity. It examines the issues and challenges involved in measuring and managing business logic and algorithmic performance as well as trading decisions and execution process in the slower request-for-quote (RFQ) markets. A table of contents can be found below.

A copy of this report is available at www.tabbgroup.com/research.

Table of Contents