EXCHANGE, MARKET DATA, FINANCIAL TECHNOLOGY OVERVIEW

Sure, when your parents grew up, computers might not have been a critical aspect of driving a business in finance. In fact, financial technology might have been practically irrelevant when transactions were paper-based or cumbersome, manual processes. In the last few decades however, computers and other aspects of the information technology have become essentially a control center for any modern financial services organization.

Every current financial company uses technology for just about everything: it is used to communicate to and between it's employees, store information about it's clients, run complicated computer models which are then used to price and to trade each financial product, and to document pretty much everything. Technology can serve as a central source of information for anything and everything a company's employees need to know. Because financial technology has become an integral component of a company's success, it is crucial that the products used and developed are at the forefront of change within that company and within the industry in general. Some of the most widely used types of financial technology are Stock Exchanges and Market Data. Though a comprehensive list of all types and variations of financial technology would be exhausting, some other major types of financial technology are ECNs, ATSs and dark pools, portfolio management & accounting systems, trade order management (OMS) and direct market access (DMA) systems, algorithmic trading, and other electronic trading systems.

Market data is a term referring to stock quotes and other trading related data associated with investments. Most commonly, pricing data is displayed once it is reported from stock exchanges or other reports and displayed with a ticker symbol and details about the trade including the bid/ask price and size, the last sale and size, quote time, trade time, exchange it has been traded on, and the volume of the trade. Market data feeds are often displayed all over trading floors in financial companies but can be found on news channels or over the internet as well, and they serve to help Traders make immediate decisions regarding the purchase or sale of stock. For this reason, the information provided by these companies is very time-sensitive and it is crucial that it is accurate. Market data can also include other types of data aside from streaming prices and this is known as static data or reference data and is basically any other information about securities that is not constantly changing ². 

An exchange is a highly organized institution and mutual organization, meaning it is owned by its member Stockbrokers, and its listed securities are bought and sold between Brokers and Dealers. These securities are a wide range of financial products including commodities, foreign exchange, futures, options contracts, unit trusts, derivatives, bonds and more.  Stock exchanges might also provide facilities for the issuance and the redemption of an array of financial instruments. Today, most transactions occurring in the marketplaces in exchanges are electronic which can increase the speed of transactions drastically ². There has also been more innovation on the market as exchanges have been opened to a type of trading known as futures contracts. A futures contract is a specific agreement between a buyer and a seller stating that specific quantities of a commodity or financial instrument will be bought with a predetermined price at a specified time in the future ².

Electronic Trading (or E-trading) is used by these exchanges as a method of trading securities such as stocks, and bonds, foreign currency, and exchange traded derivatives electronically. It uses information technology to bring together buyers and sellers through electronic media to create a virtual market place. NASDAQ, NYSE and The Chicago Mercantile Exchange (Globex) are some of the larger examples of electronic marketplaces. Exchanges that facilitate electronic trading in the United States are regulated by the Securities and Exchange Commission and are generally called electronic communications networks or ECNs and are further described below. Historically, stock markets were physical locations where buyers and sellers met and negotiated. With the improvement in communications technology in the late 20th century, the need for a physical location became less important, as traders could transact from remote locations.

There are broadly, two types of electronic trading in the financial markets:

• Business-to-business (B2B) trading is often conducted on exchanges where large investment banks and Brokers trade directly with one another, transacting large amounts of securities.

• Business-to-client (B2C) trading is where retail (i.e. individuals buying and selling relatively small amounts of stocks and shares) and institutional clients (i.e. hedge funds, fund managers or insurance companies, trading far larger amounts of securities) buy and sell from Brokers or "Dealers", who act as middle-men between the clients and the B2B markets.

While the majority of retail trading probably now happens over the internet, retail trading volumes are dwarfed by institutional, inter-dealer and exchange trading. Before the advent of E-Trading, exchange trading would typically happen on the floor of an exchange, where Traders in brightly colored jackets (to identify which firm they worked for) would shout and gesticulate at one another - a process known as open outcry or "pit trading". The exchange floors were often pit-shaped, circular and sloped downwards to the center so the traders could see one another.

For instruments which aren't exchange-traded (i.e. U.S. treasury bonds), the inter-dealer market will substitute for the exchange. This is where Dealers trade directly with one another or through inter-dealer Brokers (i.e. companies like GFI Group, BGC Partners and Garban, who act as middle-men between dealers, such as investment banks). This type of trading traditionally took place over the phone but Brokers are beginning to offer e-Trading services.

Similarly, B2C trading traditionally happened over the phone and, while much of it still does, more Brokers are allowing their clients to place orders using electronic systems. Many retail (or "discount") Brokers (i.e. Charles Schwab, E-Trade) went online during the late 1990s and most retail stock-broking probably takes place over the web now. Larger institutional clients however, will generally place electronic orders via proprietary ECNs such as Bloomberg or TradeWeb (which connect institutional clients to several dealers), or using their Brokers' proprietary software.

Debatably the near-future-replacement of traditional stock exchanges, an ECN (Electronic Communication Network) is a relatively new technology in finance which allows financial products to be sold outside of a stock exchange and allow a rapid execution of larger block trades. An ECN will charge an initial fee to be set up and do transactional charges ⁶. ECNs have become popular because trades can be executed at a lower cost per transaction, allowing a trade to be completed without an intermediary. Another positive trait of an ECN is that it keeps traders from learning about a customer's incoming order before others so they can benefit from the effects a large trade made by a client on the marketplace ². Some major ECN providers are ARCA (subsidiary of NYSE), BRUT, INET, and Super Montage (SUMO). Some newer products in the ECN space include Citi's Ontrade, Knight Capital's DirectEdge, TrackData's TrackECN and the now commonly used Bloomberg Tradebook ⁶.

A system, other than an exchange, which provides the means for connecting purchasers to sellers of securities is known as an ATS (Alternate Trading System). The more liquidity the system offers, the better the offering is for the users of the platform ⁶. The providers of the ATS will collect commission fees for each trade which is executed through their system ⁶. The number of ATS's is increasing in the financial world and the leaders in the area include BATS, Pipeline, POSIT, NYFIX, Liquidnet, NASDAQ Fix, Level, and OES ⁶. A dark pool of liquidity is a new electronic trading method commonly used by institutional investors who trade large volumes 8 which utilizes a type of ATS and provides a closed crossing network to intercept an order⁶ and increases liquidity that is not displayed on order books ². Once intercepted, the ATS isolates the order from the trading network in order to maintain absolute anonymity of the buyers and the sellers. The main benefit of tapping into a dark pool is to provide added liquidity and a more cost effective approach without leaking trading interests⁶. Today there are more than 40 different dark pool systems in the United States financial market⁸ and the major dark pool trading systems include Supernatural from Liquidnet, POSIT from ITG and SigmaX from Goldman Sachs.

Many financial companies utilize portfolio management and accounting systems technology to assist them in maximizing profits and values of their portfolio's and supporting their strategies while providing balances ². The major providers in this area are Advent's Axys, Portfolio Exchange (APX) & Geneva, CROESUS, DST Global Solutions, Eagle Investment Systems, Odyssey Financial Systems, SimCorp, State Street, and Thomson's PORTIA ⁷.  

Trade order management systems are software-based computer systems which are used in the financial industry to essentially document trading activities electronically. These systems can facilitate trade order entry, capture customer and account information, validate information, ensure against fraud, authorize payment, and utilize work-flow capabilities to manage the process. They will provide a trading blotter, assist in post-trade support, compliance, portfolio modeling and some OMSs also have an underwriting capability ². These systems will help to connect a broker to a market or vice versa, typically through what is known as FIX messaging. FIX (Financial Information Exchange) is an electronic communications protocol which is used in real-time trading related to financial transactions ⁹. It is used in both the buy side and the sell side and has become a standard in financial communication ⁹. The most common trade order management systems providers include Advent Software, Bloomberg, BNY ConvergEx Group / EzeCastle Software, Charles River Development, Fidessa LatentZero, INDATA, Investment Technology Group, and Linedata Services ⁷.

Direct market access (DMA) systems are tools which allow traders to access liquidity pools and other trading execution venues directly without having to go through a broker ⁷. They are most aggressively being used by hedge fund companies and algorithmic trading companies ⁷. Using DMA systems, these companies may execute trades just like other systems and they will allow the users to exercise more control over the way a transaction is executed ². They offer a lower transaction cost without the 'middle man' and, as a result of there being no 'middle-man' involved, there is less chance of human error ². These trades can occur incredibly fast which allows traders to take advantage of market opportunities which are not available for long periods of time ². Some of the big names in the DMA space are FlexTrade, Hotspot, FXall, Neovest, Portware, Townsend Analytics, E*Trade, GNE Touch, iDealing, IG Markets, REDIPlus by Goldman Sachs and Interactive Brokers ^(7,10).

Within some financial technology companies, algorithmic trading, sometimes also known as algo trading, black-box trading, or robo trading, is a common method employed to determine trade actions. This method involves the use of computer programs for entering trading orders with the computer algorithm employed to make decisions on the order such as the timing, price, or even the final quantity of the order. Algorithmic Trading is widely used by hedge funds and other institutional traders to generate and execute orders automatically because computers can make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information. Algorithmic trading may be used in any investment strategy and the final investment decision and implementation may be augmented at any stage with algorithmic support or may operate completely automatically (on "auto-pilot").

MAIN FUNCTIONS OF FINANCIAL TECHNOLOGY

As the financial industry becomes more competitive, the technology must respond in order to keep up with and drive the business.  Technology has taken manual processes and replaced them with automated solutions. It has essentially become a control center for any modern financial services organization. It is used for communication to and between its employees in finance, to store information, to price and to trade each financial products¹ and to document pretty much everything. Technology can serve as a central source of information for anything and everything a company's employees need to know. Technology can create new, cutting edge products to keep some companies competitive in the industry and can serve as the brains behind complex operations and processes. There is little technology does NOT do in the world of finance.

Because financial technology has become an integral component of a company's success, it is crucial that the products used and developed are at the forefront of change within that company and within the industry in general. Some of the most widely used types of financial technology and their main functions are listed below.

• Market data and real-time news is important for financial companies because it allows employees to keep up with the market. It will show company earning reports, competitor’s new policies on interest rates or other products, news about a potential new acquisition, or even a company’s reorganization. In order to stay competitive, financial companies must understand and react to this type of news each and every day and use it to make important decisions on trades ¹. The companies who create and manage the market data are responsible for collecting, organizing, and providing timely and accurate data to their clients so that these companies can make educated trades.

• Exchanges are important for the economy in the sense that they can provide an indication of the economy to those who follow the financial markets. Many people follow the activity in exchanges and pay close attention to the rise and fall of specific share prices while also analyzing the overall volatility of the market. They also provide facilities to companies where they can raise capital and sell shares to investors and are less exclusive because they give opportunities to smaller investors in addition to the large investors because each person can buy just the amount of shares he/she needs from the same companies as everyone else. Electronic trading makes transactions easier to complete, monitor, clear, and settle. 

• ECN's provide many similar functions but are able to execute trades at a lower cost per transaction and it also allows a trade to be completed without an intermediary ².  

• ATS's serve to enable connections between buyers and sellers of stocks, while dark pools are a type of ATS which is used when anonymity is desired from the buyer, the seller, or both⁸.
  ** NOTE: ECNs also, along with ATSs, dark pools, and Executing Brokers (EBs) all play an integral role on increasing liquidity in the market place while also enabling more robust and more efficient trading blocks for investors⁸ and helping to provide anonymity⁶.

• Portfolio management and accounting systems are crucial to business because they monitor the success of a product to ensure it aids in the success of the business, helps to operationalize its strategy, as well as helping the company to effectively allocate limited resources ². They all assist in report generation and all together accommodate most investments - corporate, derivative, equities, foreign, mortgage, bond, treasury, tax space and more ⁷. Depending on which system is selected for that company, an effective portfolio management system can accommodate most investment types and transactions while also revealing performance analytics ⁷.

• Trade order management systems are used to efficiently document trading activities electronically. These systems can facilitate trade order entry, capture customer and account information, validate information, ensure against fraud, authorize payments, and utilize workflow capabilities to manage the process. They will often provide a trading blotter, assist in post-trade support, compliance, portfolio modeling and some OMS's also have an underwriting capability ². These systems will help to connect a broker to a market or vice versa ⁶. Like portfolio management systems, they accommodate most investments in the corporate, derivative, equities, foreign, mortgage, bond, treasury, tax space and more ⁷. They can also accommodate most investment types and transactions while also doing report generation ⁷.

• Direct market access (DMA) systems allow companies to make trades without being required to go through a Broker ⁷ while also allowing the users to exercise more control over the way a transaction is executed ². They offer a lower transaction cost (around one cent per share) without the 'middle man' and, as a result of there being no 'middle-man' involved, there is less chance of human error ². These trades can occur incredibly fast which allows Traders to take advantage of market opportunities which are not available for long periods of time ². DMA systems have also helped institutional investors determine how much liquidity is fragmented across separate trade execution venues in the US ⁷.

INDUSTRY TRENDS

Among the most notable trends in financial technology is that speed is seen to be important and is projected to become even more important. The growth of electronic trading across all asset classes has left the providers with the burden to prove that it can execute the trades more quickly based on their strategy than can its competitors ¹¹. While taking speed into account, there has also been a clear pattern where financial companies are moving towards more 'do-it-yourself' approaches such as DMA systems where they do not need to look to brokers or middle-men any more ¹¹ which could potentially expedite the process as well.   

Today many investment firms on both the buy side and sell side are increasing their spending on technology for electronic trading. Many Floor Traders and Brokers are being removed from the trading process. Traders are relying on algorithms to analyze market conditions and then execute their orders.

Recently, Information technology has become a bit more of a cost center than people probably ever predicted it would be. As companies are required to keep upgrading, developing, and purchasing cutting-edge technology solutions, they also need to pay for those employees who will develop and maintain these systems and this can become incredibly expensive. For this reason, a growing number of positions in financial technology divisions are being outsourced to locations such as India and China ¹, where the labor costs are much less significant.

Banks are always looking to hire top talent within their technology divisions. However, more recently, some research has indicated that the strong technical skills might not be enough ¹. It is becoming increasingly important for employees in technical positions to also develop knowledge in the financial sector and have superior interpersonal skills. In a competitive industry, it is crucial that those who are interested in employment with financial technology divisions seek to understand some level of the financial domain in which they will be working in order to be able to communicate more effectively with the business and understand what the user's needs are ¹.  

There is a large degree of competition in the electronic financial technology industry. Each company makes attempts to compete with more advanced technologies and systems by increasing the capabilities of smart order routing, a method which enables larger blocks of trading and more efficient transactions⁶. Since 2007, there have been many consolidations in the ECN space⁵. BRUT and INET, once separate ECN companies, have been acquired by NASDAQ, and ARCA has been taken over by NYSE⁶. One reason these consolidations are beneficial is that these larger companies now encompass the strengths of its own product, coupled also with each one of its counterparts to keep them above the competition.   

ATS's have many benefits such as the ability to provide anonymity and increase liquidity, but industry followers are growing skeptic of the long term potential of these systems, as they believe that they might fragment the markets the way ECNs initially did when they were introduced into the marketplace. Some of these systems have attempted to control the fragmentation by linking liquidity pools together, but it has not done enough to calm critic's nerves. As the markets continue to fragment and the number of facilities for trade executions increases, firms are introducing what is called a transaction cost analysis (TCA) to help them make trading decisions. There have also been attempts to create algorithms which will be employed to determine settlement costs and any other costs related to the execution of trades ^{(6, 14)}. 

CORPORATE STRUCTURE

Professional roles within financial technology usually fall under the umbrella of the following categories: development, technical support, systems support and engineering, business analysis or project management ¹.

If one decides to become a Developer, he/she will be responsible for writing very specific programs for a company which will assist them in a particular function such as pricing of products, trade booking, risk calculation ¹ or more. The Developers will study and practice one or more computer languages to write the programs in. The most common languages used by banks today are called C++, Java, and .NET ¹. Some of the developers immersed into electronic trading development will also utilize the FIX protocol when working with the messages ⁹. Some people may still work in the application development groups, but work as Quality Assurance Analysts and focus on the functionality of these applications.

Some Developers and Technologists work in a way where they are much more immersed into the business strategy and are known as Quantitative Analysts. These professionals create financial theories, computer models, valuation technologies, and trading programs for financial companies to use to determine more successful and competitive market opportunities. The strategies and techniques they develop are typically employed by the most sophisticated and advanced technical hedge funds¹. Fast computers are used to enable the Quantitative Developer or Analyst to do a thorough examination of vast databases to find predictable patterns within the financial data ¹. These professionals have highly analytical educational backgrounds in computer science, mathematics, and physics and use the C++ programming language ¹ because it is arguably the fastest executing object oriented language ².

Technical support staff is a position which is mission critical to pretty much every financial organization. A computer 'glitch' can be incredibly damaging: if one problem occurs with one system on the trade floor and that causes an outage, it has the potential to result in a multi-million dollar loss for that company ¹. The support staff must know that companies technology inside and out in order to be able to resolve any issues that can arise at any time. On top of the pressure of keeping technical skills polished and current, the support staff also must have incredibly thick skin in order to work with Traders on the trade floors, because if a system is down, a Trader will usually not be the easiest person to deal with, nor exude much empathy.  

The systems area employees are professionals who are well versed in the computer operating systems or networks. Also known as 'infrastructure engineers', these technologists are responsible for designing the architecture and doing the modeling of the systems, engineering different systems components, and integrating the systems into the company’s current environment. In finance, it is important that systems are up and running at all times so there is constant evaluation of current systems in place, ensuring optimal performance. Although there is variation within every company, some of the most common technologies utilized in these roles include Windows, UNIX, Linux, Solaris, and Cisco products.

While Developers write the technical programs, there are other employees who will look at the way in which the technology is used and analyze the ways which might make it work better known as a Business Analyst ¹. A position in this area will normally require some domain knowledge within the business in order to accurately assess what changes in the technology might help the business. Once the changes are underway, the Analyst will usually help with the initial implementations and then leave the initiative to the Project Manager who will be in charge of the rest of the life-cycle of that project. The Project Manager will coordinate, structure, and ensure effective delivery of the technical projects. They will sometimes have to work with service providers if the technical work has been outsourced.  This is done to ensure the initiative is accurately completed, that it is finished on time ¹, and that it is done within a limited budget. Project Managers and Business Analysts can have specializations in financial or in technical areas. For example, in larger companies, one Project Manager or Analyst might focus on systems development within a specific financial domain, such as foreign exchange, while others sit within fixed income systems and analyze these applications. In some cases, these professionals become more involved in systems and might manage the upgrade of the company to a new desktop software or to a different version of their operating system. 

The career path for technical staff is really dependent on the particular company that person is working for and their personal aspirations. Those who begin working as Developers have a few options. As they gain more experience, they might broaden their technical skills to handle more technical scope and become more marketable. Some people love the technical development and remain in a position to create the applications for 20 or 30 years and there is often a need for this senior talent ¹. Many Developers master a few specific technologies and become a Leader of a team or even a Manager of a team. Some Developers also get closer to the business side by moving into a business analysis or project management function ¹.

For some of the other financial technologies explained here, such as market data, people can work in sales, operations, or data management, as well. Sales roles normally require experience in the sales life-cycle of financial products and are client facing.

These positions are highly compensated and can carry a large bonus or commission based incentive program. Operations positions are generally in the accounting, office support and human resources areas and, although they require less financial and technical knowledge specific to the business, they are not the easiest operations roles to obtain, as they will normally require an intelligent candidate who is able to learn and understand the business and get up to speed quickly. 

PRINCIPLES AND STRATEGIES

Strategies for dark pools are not exposed to the markets, however some companies use a model called Black-Scholes. Black-Scholes is a complex mathematical equation used by many financial technologies as a model for valuing options, whether traded over the counter or through an exchange ¹.

It is very widely used in practice because, compared to other models, it is easier to calculate and it models the relationship of all variables. Although the volatility is not consistent, the results of the model are helpful in organizing hedges in the appropriate proportions to minimize risk and yield a robust solution  ².