How Trading Has Changed, and Why That’s Bad For Proprietary Trading Systems.

Trading, whether it’s stocks, bonds, forex, or any other kind of asset class has changed dramatically over the last few years. Technology, the financial crisis, and new regulations among other factors have combined to make trading in 2016 and beyond look completely different than what has come before.

This is bad news for the old ways of doing business and even worse news for the closed systems that were previously used in trading.

How Trading Changed

Since the financial crisis we have seen the emergence of “high frequency trading” (or what we simply call today “trading.”) High frequency trading (HFT) uses high-speed computers and software to enter and exit trades based on algorithms related to price, volume and other variables.

The rise of HFT has been exploited by bad actors introducing techniques such as quote stuffing in order to gain an unfair edge.

At the same time as HFT was becoming the new normal, government regulators are becoming more determined to crack down on the bad actors and are issuing more and more regulations leading to a need for greater transparency both for the government and for investor peace of mind.

Meanwhile, the trading community now has to keep up with the new latency norms, avoid the actions of bad actors and comply with all the new regulations!

Compounding these problems is the old model of brittle, closed, proprietary software.

The Weaknesses of Closed Systems

One of the major problems facing trading firms is the historic industry reliance on closed trading systems.

These systems are sold and maintained by service providers who are already focused on their next sale by the time you’re setting up your system.

Proprietary service providers are waging a territorial battle for your company’s IT budget. Once they establish a beachhead, they want to upsell you with ancillary services and technologies. Start with market data and expand with a trading platform. Start with a trading platform and offer custom algorithms. There is no incentive in this model to make their technologies open or extensible or to make it easy to integrate with other technology solutions you have implemented in your environment. They certainly do not want to make it easy for your team to do your own integration work.

Furthermore, because the systems are closed, meaning that their source code is not openly available, bugs and glitches which could cost you hundreds of thousands of dollars in a single trade have to be fixed by the supplying company.

If they even notice them…

As I mentioned earlier their focus is on selling the same software to the next customer rather than making sure it’s bug-free.

What is Open Source Software?

The alternative to closed trading systems is open source software or OSS.

Founded in the 1970s out of the Free Software movement, which sought to combat soaring software prices, the basics of the open source philosophy are that better software is created through transparency of code and widely distributed peer review.

This leads to high quality software and documentation without the expensive licensing fees.

One of the most common misconceptions about OSS that has kept it from becoming more popular in the trading community is that you will have to reveal your proprietary algorithms or other trade secrets.

Nothing could be further from the truth!

You can download and use OSS software without ever revealing how the software is being used!

Because there are no sales people or license compliance checks, you could argue that OSS is actually safer than other commercial systems on the market because there are less people involved in the process.

Let’s look at 3 more benefits of using OSS:

1. Flexibility. Software flexibility is all about being able to choose solutions suitable for the end user which is you. This means that the software should be built with a flexible infrastructure, which will allow the trader to be agile and pivot when necessary to change strategies or cash in on new trends. OSS is the most flexible because there are no financial incentives to lock down one system or make it proprietary.
2. Freedom. Another major benefit to OSS for trading is freedom. Freedom from your software vendor. No longer will you be at the whims of some software developer you’ve never heard of or a company that might go out of business one day. In addition to freedom from software suppliers, you can also gain the freedom to modify your software however you see fit. You are no longer limited by what a company believes you need. Your software can be completely tailored to your trading business.
3. Cost. Closed trading systems can cost hundreds of thousands of dollars, whereas most OSS trading systems such as Marketcetera have free downloads like you can find Here. Additionally, if you do need a commercial license for a commercial module to accelerate your deployment or technical support, these services are also available.

In this article we looked at how trading has changed, and why that is bad news for closed systems.

We started off by taking a look at how trading has changed specifically looking into how high frequency trading has made life more complicated for today’s traders.

Then we examined why these new developments are bad for closed systems, most notably the lack of transparency and the focus on marketing more software rather than making sure the software is meeting the user’s needs.

Lastly we looked at what Open Source Software is, essentially free to download software that is fully customizable and supported by a community of developers and authors who find and fix bugs before they become problems, and consistently revise the software so it becomes better.

The benefits of OSS are increased flexibility, freedom to design the software however you want and a way way lower cost.

By now the choice is clear, closed systems are going the way of the dinosaur and OSS trading systems are the way of the future.

Download your FREE copy of Marketcetera Here.