Ever-faster trading speeds and incredible growth in the volume of market data mean market participants have to leverage technology like never before to manage risk. SmartBrief chatted with Jerry Hanweck Jr., the founder and CEO of Hanweck, to learn more about trends in market technology and real-time risk analytics.
As someone who has been at the forefront of trading technology for more than two decades, how have you seen the technology needs of market participants evolve?
Financial markets have changed considerably in 20 years. From a technology perspective, exchanges have gone nearly 100% electronic, enabling high-frequency trading, algorithmic execution and electronic market making. Due to these changes, quotation volumes have skyrocketed — the US equity options market alone peaks at over 25 million quotes and trades per second, compared with less than 1.5 million just seven years ago. These rapid changes create an enormous technology burden on buy-side and sell-side firms, as well as the exchanges and clearinghouses.
From an economics perspective, the markets’ understanding of and response to risk has changed as well. Thirty years ago, we endured the Crash of 1987 and the savings-and-loan crisis. Twenty years ago, we weathered the emerging markets crisis and Long-Term Capital Management. Then along came the dot.com boom… and bust, followed by the collapses of Enron and Lehman Brothers, the financial crisis, the Great Recession, the Flash Crash of 2010, and the falls of MF Global and Knight Capital. Each of these events seemed unfathomable at the time, but each successive crisis or incident brought new appreciation of financial markets risk, and new regulatory reactions to that risk.
There is an underlying theme: the pressing need for faster, better real-time risk management across the buy-side, sell-side and clearinghouses. Technological advances have made trading faster, while they have also enabled high-performance risk management. Economic and regulatory conditions have heightened the requirements for risk management, with real-time risk management at the forefront.
What are you hearing from clients about the unique challenges associated with managing the spectacular growth in the volume of market data?
To illustrate the point, the exponential growth we have seen in the US equity options market translates into the need to be able to handle peaks of more than 20 billion quotes and trades a day — about 500 GB of data a day. Firms that operate in these markets face a big-data problem: how to receive, digest, store and react to all of that data? In the past, a bank, or broker, or asset manager could perhaps manage the data processing themselves with in-house IT staff. Now, however, these firms need to be experts in big-data, high-speed networking and high-performance computing. That’s a hefty lift, and unsustainable as data volumes continue to grow and require additional resources to manage. So financial firms are turning to providers like Hanweck who specialize in processing these volumes of data and can deliver digested, actionable analytics back to them in a manageable fashion. That’s real-time analytics-as-a-service in a nutshell.
The past year has seen political events like Brexit and the US presidential election affect markets in different ways. How do your firm’s offerings help clients navigate such risks?
These events were different than other recent market shocks, but there is a similarity in that the outcomes were in general unexpected, and the markets’ reaction was swift and volatile. These kinds of events demonstrate the need for real-time risk management in today’s markets to have full visibility into how your portfolio, or your customer’s portfolio, is impacted in times of market stress so that you are equipped to make any adjustments based on a real-time view.