If you are like me, then you’ve probably heard the term CEP floating around the financial markets and how it can speed up one’s trading or bring greater efficiency to handling liquidity, without really understanding what the technology is. Recently, we have seen more technology deals about the larger players that included some sort of CEP solution. Last November, Progress Software announced that it had partnered with trading platform provider Caplin Trading Systems to provide an FX solution for Danish Jyske Bank. Under the terms of the deal, the combined companies created an end to end service for the bank, with Progress supplying the FX liquidity aggregation component that integrated with the Caplin Trader front end platform.
To gain a better understanding of what CEP is, and how it is being used in the financial industry, Forex Magnates spoke to Ben Ernest-Jones, Capital Markets Solution Architect at Progress Software. Progress’s products include Progress Apama, a CEP solution for various data intensive industries including the financial markets. The goal of the conversation was to gain an ‘under the hood’ look at the Jyske deal to provide a better understanding of the role of CEP and who it’s for.
What is CEP?
CEP is technology term that stands for Complex Event Processing. With CEP, the goal is to provide a quick way for a program to analyze and react to mounds and mounds of data. To do this, unlike traditional programs that process new data by indexing it and then perform queries to call up the new information, CEP takes a different approach and only looks for information relevant to the program’s questions. Explaining this, Ben Ernest-Jones said “With CEP, you don’t index data, but index the question. We only process information that is needed for the query.” In this methodology, the program is composed of queries that need to be answered and only data that is relevant to those questions will be processed. The end result is faster data processing and dynamic event procedures.
An example of using CEP is a high frequency trader that is searching for small trading anomalies and is entering bids and offers slightly below and above market prices. The orders are changed every split second with the goal to only be filled when a small spike occurs as the result of an aggressive buyer or seller momentarily moving the market. In a larger move, the trader doesn’t want to be filled and risk being on the wrong side of the trade. In addition to just monitoring the current inside quote, the trader also needs to know how far away from the market to enter the orders. By applying CEP technology, the trader can monitor current volatility to dynamically adjust the strategy’s orders deviation from the market. In times of less volatility, orders will be tighter, while expanding or halting the strategy altogether during periods of rising trading unpredictability. Using CEP, the program will only process information important for the trade while ignoring non-relevant data. For the trader, this leads to a faster implementation of the strategy.
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At the time of the Caplin/Progress/Jyske news, it was announced “The bank has selected Caplin Trader, an HTML5 front end that runs on the Caplin Platform, for end-user delivery. The Caplin solution will seamlessly integrate with Progress Software’s Apama Capital Markets Platform to provide a bird’s eye view of aggregated FX markets in real-time and perform smart order routing, real-time pricing of spot and derivatives, auto-hedging and more.” As a bank, it was important for Jyske to have an eFX product that could be provided to its clients to allow them to trade FX online. In addition to the distributable trading platform that Caplin Trading Systems provided, Jykse also needed a solution that could dynamically handle hedging, customized pricing, and handle order flow. For this, Progress Software’s Apama Capital Markets solution was used. The product acts as an FX liquidity aggregator and back office pricing solution.
To understand where the needs of CEP came in, Ben Ernest-Jones explained that one of the keys of order flow is not only to send trades to the top of book. Firms also look at fill quality and existing relationships. Therefore, while an LP may have the best price, it may not be historically providing the best execution. Also, depending on the business relationship, a company may want to favor one LP over another to strengthen that partnership. Ernest-Jones explained, “(using CEP) you can prioritize orders, and send orders to specific LPs, rather than the top of book, since you may want to build relationships with a specific LP. Also, CEP can be used to send orders to liquidity providers that provide better fills in specific situations. CEP does this by combining both real time and historical analytics to make decisions that incorporate both your short term and long term objectives.”
Depending on the relationship, banks provide different spreads for their trading customers. In addition, a bank needs to decide whether it will be market making as well with those clients or hedging its risk. Beyond the standard back office controls of a trading platform that are used to customize default client spreads and hedging rules, with CEP, a bank can enter additional rules for controlling the environment. This can include the automatic widening of spreads during periods of increased volatility or before news releases. Also CEP can be used for “on the fly hedging and changing spreads” of specific clients based on trades being taken. For a bank, the ability to have spreads and hedging change automatically based on historical preferences can increase trading revenue.
As opposed to turn-key solutions in the FX industry, Ben Ernest-Jones explained that CEP provides greater flexibility for users to customize their offerings and needs. He added, that in addition to requests from clients looking to implement a new trading or risk solution, a lot of new business is driven by customers seeking to increase the power of their existing lineup of offerings, and said “over the last year or so we are seeing an increase in requests specifically for CEP as a technology before they (customers) even indicate what the use case will be. People are starting to recognize CEP as an independent technology in its own right for handling not just big data, but ‘big data in motion’.”
If there was a downside to CEP, it would be the costs. Currently, solutions are mostly targeted at Tier 1 and larger Tier 2 banks due to the initial and ongoing investments needed. This includes dedicated IT staff to launch the integration of a CEP solution within a company’s existing products as well as providing ongoing support to the system. Nonetheless, as the technology becomes more and more used within the financial industry, firms applying a CEP solution may be able to distinguish their offerings from non-CEP competitors.
For more on the role of CEP in the Financial Industry we took a deeper look at the technology in our Q4 Industry Report