Posted on Thursday 10 October 2013 by Ulster Business

Analysis MATRIX

MATRIX member and Director at Citi John Healy explains how technology being researched in Northern Ireland is driving the financial services industry around the world.

Northern Ireland has a strong cluster in financial services technology. 

There is a formal Capital Markets collaborative network involving companies like Citi, the New York Stock Exchange (NYSE), Fidessa, Kofax and First Derivatives, who are coming together  to work  on addressing major issues such as building the skills required in the economy in Northern Ireland as well as sponsoring PhD projects at the two local universities.

The researchers at the universities are working on some of the most interesting problems facing the financial services industry and their results are very promising.

One area being examined is one of the most interesting technological challenges in financial services, High Frequency Trading (HFT). HFT is where financial institutions use computer models and algorithms to slice up orders from clients and feed them in to the markets in fractions of seconds. It is where speed really becomes important.

If one market participant can get the data necessary to make a decision faster than another, has the computer power to process that data and can get their buy or sell order back to the exchange before others, then they have an opportunity to take advantage of the imperfections in the market and make some money from the transaction; this is called arbitrage.

HFT technology solutions bring together the disciplines of both hardware and software. A lot of money has been invested in trying to bring the latency on the systems as a whole down to near zero. Microseconds make the difference between success and failure. Some of the research that is being undertaken is on how to optimise code, spread the computing power across multiple processing units, and move the processing on to the hardware using fully programmable gate arrays (FPGAs).

This is leading edge technology and it is developing a skills base in Northern Ireland that will be of great value to the local economy now and in the future.

Institutions that engage in HFT are also looking at ways to improve network performance. The first microwave links between Chicago and New York and between London and Frankfurt have come online and shaved off a few more of those valuable microseconds. There is talk of drone and balloon technology to install a wireless network across the Atlantic connecting the two major hubs of London and New York. This is technical innovation being driven by the markets.

There is a downside to this technology arms race. The more participants that move in to the HFT space the more difficult it becomes to find and exploit the market price differentials as the volatility is smoothed out in the market.

The race to zero latency has had the perverse effect of reducing the profitability of the high frequency traders as the opportunities for arbitrage are harder to find and the costs of maintaining the technology advantage continue to increase.

Industry regulators and the financial exchanges where business is transacted are also becoming increasingly interested in HFT. The regulators have concerns that an increasingly large portion of the market has become machines trading with machines and that this could lead to episodes of instability such as the notorious 'flash crash' of 2010 which was traced back to HFT computers.

There are proposals in several jurisdictions to tax HFT to reduce its profitability further. And exchanges, concerned about the impact of some participants having a perceived advantage over others, have in some cases started to batch up orders and randomise them before processing to remove the advantage of being first in to the market.

Addressing these concerns will ensure technology will continue to play a huge part in financial services.

Northern Ireland has successfully carved out a niche in that particular sector. The universities, government and the network of financial services institutions that we have here will drive innovation in this important area and we will continue to benefit from the heritage of engineering that we have in Northern Ireland. 

The race to zero latency is not a zero sum game as the skills that we will have created will provide an ongoing legacy.

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