NEW YORK—Linux and open-source technologies are here to stay and will continue to make inroads into the financial services sector, speakers from both the vendors and Wall Street communities said here at the Linux on Wall Street conference.
In a session titled “Leveraging Open Source to Build Cutting Edge Trading Applications,” Jeremy Lehman, chief software architect for global equities at Citigroup, told attendees on April 24 that open source has changed the traditional buy-versus-build scenario to one of buy, build or extend.
“Open source allows you to add features that are very specific to your business, while it also provides effective alternatives to J2EE [Java 2 Platform, Enterprise Edition], which has perhaps not lived up to expectations,” he said.
Lehman and his team are building a new algorithm-based trading system to help align the Citigroup organizational structure, processes and incentives so as to orchestrate deep change.
Algorithmic trading has four principle challenges: latency and throughput, market data, productivity, and market access, Lehman said, adding that the challenge is not coming up with new algorithms, but rather translating those into reusable software.
No single source of data is reliable enough for Citigroups needs right now, he said, and the company needs to be able to translate that data quickly, effectively and accurately while being the first to do that.
There are a number of innovations coming down the pike from Citigroup on that front, “but were not going to discuss that now,” Lehman said.
Open source is not in as broad use in other parts of the world as it is in the United States, and Citigroup faces some pressure to use it globally. “But we expect that to change significantly over the next few years,” he said.
The total cost of ownership is not a primary driver for using open source, Lehman said, but its rather about focus and investing where there would be a distinct advantage to the business.
From a Wall Street perspective, the question of using open source involves looking at whether or not the software can create a significant competitive advantage.
If the answer to that is yes, this then needs to be internally developed. If the software will not bring a competitive advantage, it should be outsourced and acquired from a vendor or found in open source and extended, Lehman said.
He also recommended that customers not treat vendors just as vendors, but rather create relationships with a small number of those who can provide the products and services to meet their needs.
While open source is attractive in that it is the easiest migration path from proprietary Unix to Linux on Advanced Micro Devices or Intel chip sets, that software still has a way to go on a number of fronts.
“A few things remain to be done, especially around performance, as open-source software is made to meet the needs of the majority of users. High-frequency trading is at the 0.1 percentile for performance. That is a good thing though, as it allows companies like Citigroup to develop proprietary technologies for this that enhances our competitive ability,” Lehman said.
Open-source software also has some missing functional areas, such as on the messaging, business process management and analytics fronts, he said.
Also, the integration of components into stacks needs more work, as the operating system cycles are faster than the internal certification process, he said.
“But Citigroup makes extensive use of open source, and it will be an integral part of what we do for many years to come,” Lehman concluded.
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For his part, Larry Tabb, CEO of the Tabb Group, a financial markets research and consulting firm, said the Wall Street trading environment currently faces a lot of challenges, especially the need to manage high-speed small transactions on a huge volume basis.
There is also a great need for agility at speeds never seen before, with some 20 firms trying to put out customized trading models to meet the needs of their customers, he said.
“So, it becomes an arms race for the brokers to develop the most sophisticated systems and get those out to market really quickly. They cannot just go out and create this from scratch every time, and they need an open core set they can leverage,” he said.
For every trade executed on Nasdaq in August 2005, there were 16 cancellations, a figure that is set to rise to 60 cancellations for every executed trade this year, Tabb said. The number of quotes per trade is also set to rise from 36 in 2005 to 63 in 2006. “This is an enormous amount of data,” he said.
Open-source trading standards are at the root of this, not on a code basis but around the underlying standard that allows users to communicate consistently.
This is largely due to The Financial Information eXchange (FIX) Protocol, a messaging standard developed specifically for the real-time electronic exchange of securities transactions, and its penetration on both the sell and buy sides of the business.
“Open source and FIX are also the salvation as they allow a standardized infrastructure so firms can focus on the value-added states; it jump-starts initiatives. FIX also does not stop vendors from competing in this space,” he said.
“Linux has also been a tremendous boost to the trading environment as it enables greater control of the server operating system, allows easier clustering and grid marshalling, and lets users leverage less expensive hardware with greater throughput,” Tabb said.
Linux and open-source technologies are here to stay, and customers need to leverage what is available today but also contribute to the existing pool. “Also, know where open source fits and where it doesnt, and focus on the value-add,” Tabb said.
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