THE ALGORITHMIC-TRADING arms race among brokerages and buy-side firms to accelerate their automated executions and improve returns has touched off a similar scramble among technology suppliers. It centers on a critical technology ingredient so new that the experts haven’t agreed on what to call it, though most have settled on the term “complex event processing,” or CEP. The combatants themselves are relative unknowns, and the technology is still coming together.
“No single vendor has all the pieces” that constitute CEP, says John Coulter, vice president of marketing and business development at Vhayu Technologies, one of 19 companies recently identified in a report by Boston-based consulting firm Aite Group as active in the area. Money managers and brokers, as a result, must string together the components of CEP -- high-powered databases, market-feed handlers and trading engines -- to digest and analyze the inputs into their algorithmic programs and execute strategies at subsecond speeds.
The markets are spewing out those inputs -- the “events” -- in staggering and ever-growing quantities, for which CEP is tailor-made. Coulter says that the amount of North American market data that needs to be captured and analyzed has skyrocketed to 120 gigabytes (120 billion characters) a day, from 3 gigabytes in 2004. This year, between January and the volatile summer months, the quantity of data on stock markets expanded fivefold, estimates Aite senior analyst Brad Bailey. That growth doesn’t include data explosions in other asset classes into which algorithmic trading is spreading, notably options.
Bailey projects that spending on CEP systems in the capital markets sector will climb from $140 million this year to nearly $1 billion in 2010 -- enough to keep more than a few niche suppliers in business. “It’s still very early,” he says. “We are seeing considerable experimentation and testing, and quiet rollouts,” as firms don’t want to reveal too much about their use of such a strategic weapon.
The usual early-technology-adopting suspects -- Wall Street’s bulge-bracket leaders, top-tier asset managers and more than a few hedge funds -- are buying and deploying CEP to support their high-frequency trading. Database system rivals Vhayu and Kx Systems, both in business since the 1990s, have sizable Wall Street followings that have become interested in CEP. Vhayu has announced sales to Nomura Securities Co. and RBC Capital Markets, Kx to Cantor Fitzgerald and Lehman Brothers. Deutsche Bank, JPMorgan Chase & Co., Mexico’s Casa de Bolsa Finamex and London hedge fund Aspect Capital are among the disclosed customers of Bedford, Massachusettsbased Progress Software Corp.'s Apama division, a pioneer in algorithmic trading that uses technology developed in the 1990s at the University of Cambridge in the U.K.
Populated until now by specialists -- including Apama; Chicago-based Aleri; Coral8 of Mountain View, California; StreamBase Systems of Lexington, Massachusetts; and Truviso of Foster City, California -- the CEP field has begun to attract the establishment. Dublin, Californiabased Sybase, a traditional database vendor to large financial institutions, has allied with Aleri for a tick-capture system to support algo trading at Mitsubishi UFJ Securities International in London. Aleri CEO Don DeLoach says the company is involved in bigger projects that he cannot discuss in detail. Among them: “a large hedge fund doing real-time mark-to-market and risk management across its silos and large sell-side firms achieving ultralow latency [processing speeds] on a massive scale.”
IBM Corp. is partnering with several CEP vendors, and Oracle Corp., which in 2005 acquired TimesTen, a rival of Vhayu and Kx, has made acquisition overtures to San Jose, California’s BEA Systems, which entered the CEP business this year.
Advocates say CEP is too powerful to stay confined to algorithmic trading and analytics and will soon take on other enterprise processing and compliance functions. Agent Logic, an eight-year-old Vienna, Virginia, company with defense and national security clients, recently began selling CEP software for analysis of payment patterns, to prevent fraud and money laundering. For now, though, most of the focus remains on trading -- and on additional asset classes. Truviso, a 2007 entrant, finds foreign exchange “a green-field opportunity” for a University of California, Berkeley, database innovation that it is commercializing, says co-founder and executive vice president Michael Trigg. New York currency investment manager FX Concepts is a customer, and Trigg says, “We have been able to leapfrog the competition.” They surely won’t be the last.
