A Bridge to FX

Complex event processing isn't just for trading equities. FXall delivers its new FXall Trading solution for foreign exchange that is powered by CEP. By Phil Albinus

Complex event processing (CEP) has long been the domain of algorithmic trading on the equity side of the business. Thanks to a maturing platform for handling the vast stores of market data inside a trading firm, CEP is entering foreign exchange (FX) with a laser-like focus.

Last month, electronic FX trading platform FXall released a new trading platform for its active trading clients to take advantage of algorithmic FX trading. With the new FXall Trading platform, the firm will offer services to more than 800 global financial institutions that trade daily on FXall, which had $15 trillion in annual volume last year. With the release of its new FXall Trading solution, customers can now find a vibrant CEP engine under the hood.

An FXall Project

The FXall Trading solution relies on CEP technology to compute algorithmic trading strategies that are then sent off to more than 60 liquidity providers worldwide, as well as Accelor, FXall's own ECN. According to Minor Huffman, CTO for FXall, the new platform is offered to clients as a user interface that sits on clients' desks. 

FXall officials describe the active trader portion as a single component of a solution that incorporates other execution mechanisms such as Request for Stream (RFS) for spot, swap, forward and non-deliverable forward (NDF) products in major and emerging currencies. Active traders can deploy FXall's collaborative tools to strengthen direct bank relationships and facilitate multi-currency portfolio management through cross-currency netting.

For FXall, the decision to go with CEP was easy, but choosing the right CEP provider proved challenging. According to Huffman, the strongest reason to opt for CEP came when discussing the need for strong modeling capabilities. "One of the important elements we see with algorithmic trading is looking for the ‘one in a million' event. A solid CEP engine is very efficient at doing that type of data analysis," he says.

According to Huffman, flesh and blood analysts or even a group of mathematicians can never match the accuracy and speed of a CEP engine.

"From our clients, we are seeing a greater demand for algorithmic-style trading. This is newer to the field of FX than it is to other asset classes," he says.

Although algorithmic trading has been a mainstay in equities, FX is now mature enough for the speed, nimbleness and rigors of automated trading strategies. Huffman says FXall is confident this is the case. "Though there are a couple of challenges with algorithmic trading and the FX market. The first is the access to liquidity, which is a key requirement for algorithms. In terms of efficiency of execution, FX is a little bit different than equity or futures markets where the access to liquidity is more widespread," says Huffman.

Huffman continues: "We see the impact of algorithmic trading in the marketplace. Traders are using algorithms very effectively for execution efficiency. In terms of the inroads, there are more tickets coming through at a higher frequency."

The CEP Vendor Audition

In the course of designing the new FXall Trading solution, the firm auditioned a number of CEP solution providers, before settling on BEA Systems, which was acquired by Oracle in early 2008. "We surveyed the market for various projects out there, tried to do a level of due diligence and did trials with other different products before we selected the final solution from BEA. We wanted good performance, the ability to operate in our current environment, a demonstrable ability to use the product to innovate and a support model that would be there for us when we ran into inevitable problems."

The FXall team started its CEP evaluation toward the end of 2007 and began with a solution from BEA Systems at the beginning of 2008. In the middle of that year, Huffman says, some of the initial FXall components went live. The full version of FXall Trading went live officially this March.

FXall already used the BEA Systems WebLogic CEP solution with various Oracle tools, so the January 2008 announcement of Oracle's acquisition of BEA was not a hurdle for FXall. "When we engaged with them, the transition to Oracle occurred in the second quarter of last year. I wasn't concerned about Oracle because they are an important technology supplier to FXall," says Huffman, explaining that the firm uses Oracle for its relational databases.

FXall chose to rely on Oracle for a number of reasons: a solid reputation in the CEP space, the ability to get FXall's Java-based crew up and running quickly, and a low hardware footprint. "One of our criteria for evaluating any CEP vendor was how fast it would take to get our staff up to speed. We knew the models and methodologies but we needed a bit of training for the staff. We were able to get people up to speed quickly on the product set. We are a core Java shop and the developers were up and running and productive in a short period of time," says Huffman. FXall had five coders based in New York working on the CEP project. When the crew encountered any difficulties, Oracle sent over representatives to help troubleshoot any concerns.

According to those close to the project, the new hardware needs were minimal, which helped seal the deal. "We added a few boxes, but they were in our standard platform. We were able to run on a very lightweight Unix infrastructure. We are primarily a Linux shop and that was a key part of our decision process," says Huffman.

For Oracle, a light footprint is key in these harsh economic times when every IT dollar counts. "When the Event Server was designed, one of the major goals was a small footprint and the ability to work on commodity hardware and established operating systems," says Stephanie McReynolds, director of product management, event-driven architecture suite, for Oracle. "This helped to achieve the low latencies and high throughputs on existing hardware and software without changing the environments of the customers."

There were no complaints with the Oracle solution thanks to FXall's experience with the legacy platform from BEA Systems. "The support that we received from the Oracle team on the product was excellent. If we had problems they would stop by and sit at the desk for the day. That was critical in the initial stages of the project and later when we were tuning the infrastructure. The supportability of the model was a key factor in vendor selection as it was crucial to the success of the project," says Huffman.

Inside Oracle

Thanks to a sharp focus on CEP infrastructure and a team that focuses on in-memory query languages across a wide variety of industries, Oracle was able to provide FXall with tools based on the BEA WebLogic Event Server. These features and more can now be found in Oracle CEP 10gR3.

According to Robin Smith, a former BEA representative and now Product Management/Strategy Director for Oracle CEP products, FXall was one of first customers to see the true value proposition of CEP technology. "We provide a low-latency, high-throughput solution through-out the software stack from the Java virtual machine (JVM) to the CEP container. We had a foundation of understanding and belief on their side with our Event-Driven Architecture technologies. Once we achieved their real-time goals, we moved in with Oracle CEP 10gR3 and they are now building out fast solutions on that container leveraging the JRockit Real Time solution as well."

For Oracle, CEP is no longer just a foundation for equities trading on the trading floor; CEP is migrating not only to other trading desks but to other divisions and missions within today's ambitious investment firms. Oracle's CEP team is already witnessing a significant number of instances where firms are using CEP outside of the trading environment. "We are definitely seeing signs that the technology is expanding its footprint within its accounts and still providing a lot of value on the trading floor, but moving into other organizations and operations in the business," McReynolds says. "This is a natural evolution of technology adoption within organizations."

CEP appears to have reached a state of maturity where CIOs and CTOs are now looking for more projects that could benefit from CEP. She says there are varying factors that lead to broader adoption. "Once most companies test it in a trading environment, because of the focus on high throughput and low latency it can be applied almost anywhere in the business. Because the latency rates in the back office are much lower than you traditionally see on the trading floor, there is a comfort level with CEP," says McReynolds. "After they test it at the high end of their use cases, you see it deployed elsewhere internally."

A CEP Vision in a Recession

In the wake of the current economic challenges, firms and especially their IT teams are making do with less. In addition to widespread IT layoffs, there is a greater emphasis on compliance and risk management. Furthermore, there is the need to simplify the overall technology and to have it available in more areas of the business. If that were not enough, senior management must to be able to monitor their firms' operations at a finer, granular level.

According to Smith, financial services firms require more simplistic and visual tools and they must be able to deliver them faster to the marketplace. "We are seeing more sharing across the grid and we are adding a visual drag and drop to the event queries," he says.

Will cloud computing fill the skies in this recession? "There is more discussion in the market around cloud computing and yet we may not be seeing hands-on customer demand. I am sure the cloud computing market will evolve but I think we are still in the early stages of the demand there," McReynolds says.

CEP is now being called on to manage risk and oversee pre- and post-trade compliance. Although the FX market doesn't have the same type of regulatory compliance as that found in the equity world, FXall relied on CEP for post-trade compliance and in-flight execution monitoring.

According to Huffman, one of the differences in the FX world is that often times there is a handshake between the client and the bank, which means that the bank has a request for a quote and must send either an "accept" or "reject" statement. "It's important for us to monitor transactions like that. We see CEP looking for anomalies in the data. We find it extremely helpful to monitor the underlying health of the trading system," says Huffman. CEP also helps with the vast amount of sub-second messages and alerts that come through the system. FXall utilizes the CEP engine to set up the appropriate filters to look for trigger points or warning points that may cause potential problems in the system. "This allows us to react and avoid having any system disruptions," says Huffman.

CEP also helps FXall and its clients measure operational risk. "We don't take a principal role in any transaction. We therefore view risk from an operational perspective, and CEP proved valuable in monitoring the health of our systems," Huffman says. He adds that when clients are disconnected from the system, which happens from time to time, FXall is able to provide a view of their transactions. "We monitor for any patterns that would be out of line in the marketplace and that helps us to make sure we have a fair marketplace for our clients," says Huffman.

In this climate, Oracle is seeing both small-scale and large scale IT projects that rely on CEP. "A lot of the projects are centered on monitoring, surveillance and risk management. Projects focused on minimizing the exposure that an organization has to crisis factors are gaining in importance. In many cases, those can be small projects or large projects. I think the financial crisis has changed the nature of the implementation slightly and the focus of those implementations-rather than changing the footprint of the implementations themselves," says McReynolds.

A CEP Demand

In terms of new compliance, many industry analysts interviewed by Waters predict a new wave of market oversight aimed at avoiding another global meltdown. Will this new compliance be an opportunity for CEP? McReynolds is already seeing evidence of this. "Even before there is an administrative edict, we are seeing early indications of interest, not only from trading organizations but also from government entities, which are adopting CEP technologies in-house to manage risk. Any edict from the government will drive additional demand for CEP technology to be applied," McReynolds says.

"We are seeing interest around the banking system and risk management worldwide and across the industry in leveraging this technology in the real-time analysis of events," says Smith. "Even in these troubled times people are looking at this technology to save money and use these structures to address the demand around event technology."

 After the launch of FXall's active trading platform, Huffman says that CEP demands from clients will grow. "Since we just launched, I have no doubt that our customers will come to us with ideas to enhance the product," he says. 

Although Huffman declines to go into specifics, FXall is looking for more CEP-based projects. "We're looking at it as a tool that can complement our other business lines. There is a lot of growth for us with the launch of our active trading product. I see that client segment being the one that is most comfortable with algorithmic trading."

For more information on CEP, please visit http://www.oracle.com/technologies/soa/eda/index.html.

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