January 1, 2012

Bonds: Part 3b - The Technology continued

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Modern investment trading relies very heavily on technology. Computers are now involved in nearly every corner of large banks’ trading activities – a big change from more manual processes over 20 years ago. It would certainly be impossible to run a EGB primary dealership without significant technology expenditure. This post details an overview of the technologies I saw on EGB desks.

I was hired as a Java expert, so by my very nature I mainly worked on Java programs. Still most code written right now (ie. not in old legacy systems) in the banks where I worked was Java, and by a wide margin. The main exceptions are financial math libraries which are always written in C++ (by the quant teams) and quick to develop, tactical desktop apps usually written in Excel VBA. Traders are all very familiar with Excel and use it extensively. On more than one occasion my job was to take a VBA app and convert it to a faster, more reliable server based application. I heard that C# was sometimes used for GUI applications, although they would often communicate with Java server processes.

In Java work, J2SE was used exclusively. J2EE has a very bad reputation as too slow and process heavy. Spring is common. JUnit is used everywhere for unit testing. Same with Jira for bug tracking, but each place I’ve worked used a different build/deploy system. Eclipse is the most common IDE, but IntelliJ has a few vocal adherents – generally coders can use any IDE they want (as long as it’s free).

Servers were always Linux machines. Developer and trader desktops used Windows – as people are more familiar with those. Both desktops and servers tended to be quite powerful machines, and replaced every couple of years. A trader often had 2 or 3 PCs under their desk (if for no other reason than to run their 6+ monitors). Server side processes were split across multiple machines. One EGB desk had over 20 production servers dedicated to their systems – the others were not far behind. There was a constant push from infrastructure IT teams to use virtual servers to save money, but that never happened with anything that involved pricing or quoting. Speed was vital and we had the money.

The whole system was made up of many little programs – most doing a single task. Any diagram describing the flow of data around the whole system quickly became a mess, even without considering external systems. There would be separate applications for position-keeping, risk, tracking obligations, connecting to markets, negotiating RFQs, straight-through-processing (STP – where a trade automatically goes through to backend processing), often a few for pricing, and many more. However a trader would normally view and control the internal EGB systems through a single monolithic GUI. If more than one GUI was required it would always generate complaints. Speed complaints around trader GUIs were also very common – understandably because they did so much.

Trading necessarily requires dealing with external systems, both outside and inside the bank. We would need to pass on our data (via STP) to other bank teams for clearing, settlement, accounting, compliance, reporting. Similarly we would take in instrument static data (information like a bonds payment structure, credit rating, maturity). Externally we would connect to multiple markets for quoting, pricing and trading. Inside the team communication was sometimes done over bespoke socket or Java RMI, but more normally via Tibco RV or Ion Marketview messaging systems. Inside the bank RV, IBM MQ or Tibco EMS were both commonly used. RV is well-entrenched in banks and always had a team dedicated to its support, although everyone seemed to be looking for better.

Databases weren’t used extensively. Mainly for initialisation data and historical data. Anything that was needed for pricing was cached in memory or passed over low-latency messaging systems – a database is just too slow. Their second-class status meant little effort was put into their design. Sybase was quite common. Oracle and SqlServer were around too. MySql was strangely absent.

Tick databases, in particular KDB, were also used to varying extents. These are databases specially designed to hold large amount of time-series data. We used them to store every future price tick, every bond price tick and more. Gigabytes of data per day. This data could them be used to analyse market events in fine detail or back test new pricing algorithms. At one bank we implemented a future pricing algorithm that people (including traders) believed gave better prices. At the next bank I worked the same algorithm was back tested with data from KDB and proved to offer no benefit.

Each market had their own API. These were regularly updated. To get around the constant work of writing their own gateways to the markets, many banks bought market gateways from Ion. They specialise in technology for fixed income banking and started with the market gateways and a messaging bus to tie them together called Marketview (often abbreviated to Mkv). They now produce a number of other applications to do nearly everything in bonds technology – pricing, quoting, RFQ negotiation, a GUI, position keeping and more. Every EGB team I worked in used Ion products to some extent. But I would be surprised if anyone outside for fixed income has heard of them – it is a bit of a niche skill.

Ion were commonly hated by management. The company was adept at extracting the most money from banks without them deciding to go it alone. A few banks did try that (including one where I worked), but came back to Ion when they realised the costs involved in writing bespoke gateways. I found Mkv an acceptable product. They do messaging in a strange non-standard manner, but it worked and that is what counts to me.

Most EGB systems were bespoke and written by the EGB team. Utilities like messaging and databases were purchased from vendors. It was believed that having our own systems which exactly matched the traders needs was a competitive advantage. Also, we were incredibly more responsive to traders’ functionality requests. Ion applications and Bloomberg were the main exceptions. All the traders have Bloomberg terminals and used them extensively for market research. Bloomberg was generally considered the authoritative source for financial information or maths. On two occasions I produced applications that differed from Bloomberg in their mathematical outputs. Both times I proved to everyones satisfaction that my work was correct and both times I was asked to change it to match Bloomberg because “that’s what everyone uses”. On one of those occasions Bloomberg fixed their system a month later so I had to change my application back to its original algorithm. Bloomberg have a reputation for changing their system without prior notice – the first time IT teams become aware of the change is when their systems break.

The monitoring of production systems is omnipresent. Whenever a new system is delivered, one of the first questions support will ask is “how can we tell when it goes wrong?” Every bank I’ve worked at has a different monitoring system. This always includes a system to scrape log files checking for errors or other key terms and then flashing them up on support’s screen. Server resources and network traffic are similarly monitored. Java applications often have JMX interfaces or bespoke administration tools.

Much of modern trading is controlled by computer. Certainly all the routine parts are automated so traders can concentrate on more complex issues. This includes updating prices and quotes for changes in the yield curve on a millisecond scale. It also means trading on behalf of the trader. For example, a EGB flow desk at a large bank will receive (in the good times) thousands of RFQs on the D2C markets every day. A trader would be overwhelmed trying to deal with all these, but in reality over 90% are dealt with by an autonegotiation system and never seen by a trader until it appears in their PnL. This program automatically works out a price to quote based on rules based on various parameters including the type of bond, our internal price, the quality of the potential client (referred to as tiering), and the bank’s current positions. A RFQ that falls outside the rules is passed to the trader for a decision, but this is the exception.


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