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Kirk Wylie

OpenGamma

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Spotlight-blackInnovations in Trading and Technology (more stories)

18 June 2012

Achieving Alpha Through Open Source

Cost control, transparency and technology are three reasons why open source makes sense.

The beauty of open-source technology is simple: it gives everyone access to the same standard of tools that the most sophisticated market participants are using and it so in a radically transparent way.

Whenever people across firms write code and build systems that are fundamentally similar, that technology should be open source. In-house developers should have the freedom to focus on those pieces of proprietary technology that do deliver a competitive advantage especially considering how new regulations are changing the way financial firms deal with risk. It’s requiring that significant investment go into upgrading risk infrastructures to handle new regulations meaning that developers need much more generic architectures that are capable of making changes on the fly.

I’ve heard arguments that trading and risk analytics are the secret sauce for many firms but in the end, the competitive advantage gained from these functionalities comes down to a few key factors – the trader himself, the choice of metrics to view a portfolio, the points to include in a yield curve. These are all human factors that are in no way reliant on a platform’s source code.

Open source trading and risk solutions actually enable this. They remove need to devote brainpower to core technological functions, allowing firms to focus their efforts in more profitable areas and reap the benefits faster than if they have to build those technologies from scratch.

Using open source technology for these functions also makes sense for a lot of firms in this post-recession world.

Margins are down, probably permanently, and it’s a challenge for funds to earn high returns when interest rates are hovering around 0.5 percent. This is causing firms to look for ways to reduce costs and one of the heaviest costs they carry is building and maintaining proprietary systems. The fundamental premise of all open source solutions should be to allow firms to largely get rid of these costs without sacrificing performance.

Firms are also heavily concerned with transparency as they try to ensure compliance with new regulatory requirements. Open source technology is one way to help satisfy demands for this transparency – it is radically open and nothing is hidden. There is never any question as to what is inside and even if regulators would never look at the source code, they know they could.

Open source solutions are also built to be used in today’s technological environment. Given we work in an industry with timely demands, a year-long lag between choosing a system and finally seeing it in action is simply not an option. Rather, it should be a five minute download-to-joy time.

Open source solutions are also all about empowering developers, who know their firms’ needs better than anyone. With this kind of technology, when a trader or risk manager makes a request, the in-house developer is able to meet it quickly and easily rather than having to relay the request to the vendor and then manage its often lengthy implementation.

In the end, if you’re tired of building and maintaining way more code than you need to, or tired of the way legacy vendors have been treating you, open source is the way to go.

Spotlight-white-trans For more stories in the Innovations in Trading and Technology Spotlight Series click here.

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4 Comments to "Achieving Alpha Through Open Source":
  • Missing
    jimmysu

    18 June 2012

    I think the use of open source infrastructure software would lower the barrier of entry for competitors, which may outweigh the benefit of lower cost.

    Comments (1)

  • Missing
    kirkwylie

    19 June 2012

    Jimmy: I think that's a relevant point, if there wasn't Open Source software already out there. Once it's there, if you don't adopt it, you're just increasing your relevant cost structure compared to competitors who adopt it, putting you at a disadvantage. So yes, I can see your point that incumbant firms might not want Open Source solutions to exist at all, but once they do exist, you'll be at a disadvantage if you don't adopt them.

    Comments (2)

  • Missing
    dbs

    20 June 2012

    So what do you think are the highest-value pieces of open source "already out there"?

    Comments (3)

  • Missing
    kirkwylie

    21 June 2012

    Quite aside from the non-finance-specific options (such as Linux, PostgreSQL, ActiveMQ/RabbitMQ, Spring, Tomcat, Geronimo, JBoss, ...), there have been some finance-specific Open Source efforts as well.

    I know of quite a few firms who have adopted QuantLib to some success, although the current developer community isn't as focused as one might like (one reason we didn't adopt it). In addition, we're now seeing new efforts through OpenMAMA and OpenMAMDA tackling the market data side.

    And of course there's the OpenGamma Platform for front-office trading and risk analytics. I'm not going to shill about it here; feel free to have a look at the website though.

    Comments (2)

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