Although CEP is still in its infancy, the ability to derive more business information from the data generated by the exchange will be a key success factor for exchanges in the future.

Still in relative infancy in the exchange world, Complex Event Processing (CEP) technology holds great promise beyond its current use in the surveillance and supervision functions. Given the recent market turmoil and the increasing competition in the trading environment, the ability to offer new services based on CEP could provide exchanges with a significant competitive edge.

CEP is software technology that enables applications to monitor multiple streams of event data, to analyze them in terms of key performance indicators that are expressed in event rules, and to act upon opportunities and threats in real time. CEP users can specify the information that is of interest to them whether it is low-level network processing data or high-level enterprise management intelligence.

One of the significant advantages of CEP is that it enables users to take action in response to specific scenarios as they occur, rather than having to wait for data to be compiled in a database before being able to access it.

According to Aite group, a Boston-based research firm, in the coming years many of the solutions for dealing with the capital markets data explosion will be built around event processing frameworks. “Many problems, restated with an event processing formulation, look much more manageable,” says Aite.

“Today, there are significant opportunities for firms to leverage solutions developed by third-party providers to solve many of the challenges that the ever-increasing data production in the capital markets is posing.”

CEP enables real-time analysis of data because rules can be built very quickly to enable staff to look at data from different perspectives.

Most exchanges use CEP technology for surveillance and supervision. It is ideal for analyzing the vast amounts of data that trading systems generate. Traditionally, these functions were handled by systems built in-house, which were development-intensive, requiring a programmer to build rules on how to search for specific data. But as market volumes have grown and algorithmic and program trading have made trading more complex, exchanges have looked for more flexible technology. At the same time, trading has become fragmented across multiple venues, further distributing trading and increasing competition.

It is in this competitive arena that CEP shows its greatest potential. Sellside customers of exchanges are using CEP technology to build algorithms that identify trading opportunities. There is no reason that exchanges cannot also use CEP to offer algorithms to their members, which in turn will enable their members to offer new services to their customers.

It has become increasingly difficult for exchanges to differentiate themselves as competition from new market entrants intensifies. Today competition is based on latency and trading fees. This model is not sustainable over the long term, because technology will enable everyone to eventually catch up. Therefore, it is vital to be able to offer additional services that enable differentiation – NASDAQ OMX, for example, offers Smart Order Routing services, which is a great differentiator and will grow in importance in the future.

Regulators may well push exchanges into implementing more CEP-based solutions in the surveillance area. Given how complex markets have become and the large number of liquidity pools available, it is increasingly difficult to survey trading activity across different marketplaces, but regulators may start to demand new types of analysis across different markets. CEP could play an interesting role here, with exchanges ultimately offering compliance services to their members.

Although CEP is still in its infancy, the ability to derive more business information from the data generated by the exchange will be a key success factor for exchanges in the future. We are not yet at the point where we can see all the opportunities that will come from CEP technology, but they are beginning to appear on the radar.

Cecilia Qvist
Head of Business Development
NASDAQ OMX Market Technology.
 

MarketView 2008:2