Brian Conlon Outlines His Technology Roadmap - First Derivatives plc

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FEBRUARY 2011
VOL. 12 / ISSUE 118
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First Derivatives’
Brian Conlon outlines his
TECHNOLOGY ROADMAP
First Derivatives and its founding CEO Brian Conlon may be new names in
the FX world, but the company’s background in equities, its focus now on the
FX high frequency space, market data and its software-as-a-service approach,
may soon make FD a household name in this industry.
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This article first appeared in: Profit & Loss Magazine,
February 2011 | issue 118 | Volume 12
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First Derivatives’ Brian Conlon Outlines His
TECHNOLOGY ROADMAP
First Derivatives and its founding CEO Brian Conlon may be new names in the FX world, but the
companyʼs background in equities, its focus now on the FX high frequency space, market data
and its software-as-a-service approach, may soon make FD a household name in this industry.
Julie Ros: It has been nearly a year since FD’s acquisition of
Cognotec; can you give me an update on how the integration
has gone
Brian Conlon: In the period since we acquired them, we’ve
been building our product suite with a common technology
base and bringing the two organisations closer together. At
this juncture, we are effectively operating as one
organisation. Branding-wise, First Derivatives is the brand
and the product is Delta, so the legacy Cognotec products are
now Delta RealStream and Delta Margin. In terms of our
aspirations to slot their technology and customer base into
our overall group-wide structure, it has been a great success.
At the start, we had more of an equity and institutional focus,
but with Cognotec we got deep expertise in the FX space, as
well as access to the retail and buy side. So from that
perspective we feel the acquisition and integration have gone
very well.
JR: A year ago, you indicated that FD would be making a
significant investment in the Cognotec products. Have there
been any new products launched or that are in development
BC: The story has really been about integration. The
RealStream product was pretty much in its infancy when we
took over. We consolidated the product, and now have 10
customers actively using it. We’ve been building up the
feature set in terms of the venues we can trade on, as well as
enhancing the algo program trading features and enhanced
hedging and risk management features. On the margin side,
we’re adding a mobile front end, as well as expert advisor
and graphing capabilities. So we’ve continued to build out
the feature set and couple the product more closely with our
algo trading offering, which is aimed primarily at the high
frequency community.
JR: How has deployment of the RealStream technology
(which offers a range of integration and STP tools aimed at
the HF space) been received
BC: After the acquisition of Cognotec, the fact that we were
able to retain the customers gives us comfort on two fronts.
Customers were sufficiently supportive of the technology
and gave us the breathing space to move forward with the
technology. Also, they were very supportive because we
could offer a bigger organisation that had a broader base in
terms of the markets we work in and the customers we work
with. The technology has been very well received, and the
fact that we now have the ability to operate in the ultra-high
frequency world is also something that our customers are
very excited about. It helps them as well on the brokerage
side in terms of the types of people they are able to deal
with, so for some that had only been dealing on the retail
side on the brokers, they’re now attracting high frequency
clients into their operations because we can give them a high
frequency offering on the trading side. This means we have
been able to help our customers grow their own customer
base because of the offering that we have. In short, we think
the technology has been very well received in terms of what
we’ve done with it – for example, moving from Chicago to
NY4 has been a big boost in terms of reducing latency,
reliability and performance.
JR: How has FD integrated Cognotec’s products into its
overall offering
BC: We’ve rebranded Cognotec’s products and where there’s
overlap, we’re migrating and integrating the functionality, so
within a very short space of time it’s going to be effectively
the same product suite, and in essence, it already is.
JR: Have you seen increased interest in FX from new and
existing clients
BC: That’s part of the macroeconomic trend. The FX market
is growing so rapidly, while equity has not been growing at
the same pace as it was a few years ago. The FX market is
fragmenting and there has been lot of volatility, so there’s
renewed interest in the FX market from a trading
perspective. We’ve seen a lot of interest from clients on the
FX side, because high frequency and program trading is
relatively new to FX compared to the equity market where
it’s been around a number of years. So between the
macroeconomic trend in terms of the volatility in the FX
market, the increase in retail FX trading, the move towards
more equity type trading environments and fragmentation of
liquidity as more high frequency traders become price
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“WE’VE SEEN A LOT OF INTEREST
FROM CLIENTS ON THE FX SIDE,
BECAUSE HIGH FREQUENCY
AND PROGRAM TRADING IS
RELATIVELY NEW TO FX
COMPARED TO THE EQUITY
MARKET WHERE IT’S BEEN
AROUND A NUMBER OF YEARS.“
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“Everyone needs data – volumes are growing and
now weʼve got the software to deal with the data and
the expertise to advise people on how to better
organise, store, access and analyse it.”
makers instead of just price takers, has meant that we’ve
definitely seen an increase in interest in the FX side of
things. So in short, yes!
JR: FD has a track record of acquiring niche capital markets
technology companies. Can you expand on this philosophy
by providing some insight into the other acquisitions the firm
has made in the past two years
BC: It’s safe to say that if you looked at this company three
years ago, we were a capital markets service provider
primarily focussed on the UK and to a certain extent, North
America. We made a strategic decision around three years
ago to have a product offering as well as a services
offering. We could go one of two ways – grow organically,
building our own software, or acquire companies. We have
a hybrid model. We acquired Hologram in Australia, for
example, which gave us a presence in a market where we
didn’t have one before, so that improved our global reach in
terms of our ability to service markets in North America,
Europe and Asia Pacific. So Hologram was like a
geographical acquisition. In terms of our other acquisitions,
we have been very strong in market data, so we acquired
Reference Data Factory, which has a reference data offering
that sits side by side in our data arena. We also acquired a
niche data consulting firm about six months ago, LakeFront
Data Ventures, to increase our expertise and presence in the
data market.
So now we have a very strong presence in the data market,
we have a very strong market data offering, a very strong
reference data offering, and a very strong data consulting
operation. Everyone needs data – volumes are growing and
now we’ve got the software to deal with the data and the
expertise to advise people on how to better organise, store,
access and analyse it.
The other main acquisition was on the Cognotec side. Now
we have a better focus and expertise on the FX side and can
provide our software as a service because of Cognotec’s
expertise in hosting. We didn’t have that before, so now all
our software is available as a hosted service. Historically, the
markets we’ve been offering have essentially been on the
investment banking side; now we have a market on the retail,
brokerage and buy sides. So it’s a combination in terms of
our strategy, to determine small niche companies that can
accelerate our overall strategic goals. Along the way, we also
picked up an increased interest in Kx Systems, which has a
high-performance and time series analysis database, Kdb+.
JR: What about risk management
BC: When we acquired Hologram, we were in the process
of building two products – a risk management product and
a product for exchanges. The acquisition allowed us to
accelerate on the risk management side and on the
exchanges side, we signed up the Singapore Exchange
about nine months ago for our market monitoring
software. Our exchange software and risk management
have all been developed on the same technology platform;
they all talk to each other, as well as the Delta Algo, Delta
Stream and Delta Margin products, meaning we have a
very broad offering and consulting arm to support all those
different fronts.
JR: What types of customers do you have
BC: We have a number of products under the Delta umbrella
that have different customer sets. Delta Algo, for example, is
used by banks and buy side for algorithmic program trading;
Delta Stream is a market data product which is used for data
capture, real time P&L, and real time risk. Delta RDF –
Reference Data Factory – is used by hedge funds and buy
side.
JR: Generally speaking, how has the high frequency community
fared over the past 18 months Have you seen particular
regions or segments outperform
BC: By its nature it’s a very dynamic, secretive,
unregulated industry, so it’s hard to get any real data to
parse or analyse, but on the equity side I’d say it’s been a
bit more difficult because the market’s maturing – the arms
race in terms of driving latency down can only go so far.
Whatever arbitrage opportunities that are there are being
driven out – the flash crash episode didn’t help either in
terms of its focus from the regulatory side, and there has
also been stability in terms of volatility. Whereas with other
asset classes like FX and commodities, those markets aren’t
as mature, especially on the commodity side where it’s a lot
more fragmented in terms of the types of products you can
trade – there’s a lot of room left in those to apply the
technology foundation that the equity guys have. They will
continue to grow and the heavy duty regulation of banks is
going to drive people into smaller organisations
themselves, where they set up their own high frequency
operations. So I think it’s probably mixed equity, FX and
other asset classes that are starting to get some traction and
really make some money.
JR: Do you see banks spinning off high frequency/prop
desks or perhaps outsourcing this function to HF firms
BC: It’s going to be very difficult for a bank that has a
profitable desk to shut it down, but history shows that when
regulations are put in place, the very clever people at banks
find ways and means of dealing with that without breaking
the rules. It’s going to add to the complexity of everything –
particularly when regulations are not common across all
jurisdictions. Layer on top of that the retail side – you’ve got
the NFA coming in with its own regulations, Japan trying to
protect the retail space, new capital adequacy directives
coming out – it’s very much an uncertain, very confused
landscape, which makes it hard to make any predictions, but
I think there will be more fragmentation and more high
frequency firms setting up. I do think that regulation will
mean more fragmentation in terms of smaller operations and
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trading desks being spun off and even banks investing in
outside operations.
JR: You recently announced a partnership with Trading Cros
Connects (TXC). Can you tell me about the significance of
that alliance
BC: Our partnership with TXC is designed to provide a onestop
shop for people setting up new high frequency trading
desks. The fact that we were chosen by TXC ahead of a
number of our competitors is a validation of our offering.
Delta Algo is cross asset classes – it works for equities, fixed
income, commodities and FX, so the fact that TXC picked us
over the others is a big story for us.
JR: What attracted you to TXC
BC: We’re a software and consulting operation, so in
terms of giving us a one-stop shop offering to newly
fledged high frequency trading desks or a HF hedge fund
or operation, we can now go to them with a single
offering. TXC will provide the hosting, collocation,
hardware setup and market data connectivity. For our part,
we have the flexibility, time to market and feature rich
niche software, which will effectively allow a small
operation to hit the ground running very quickly. They
don’t have to worry about broker relationships and in
many cases, TXC will be helping out on the capital side.
So for a small operation (especially for people who’ve left
a large firm) this allows them to hit the ground running
very fast and only have to deal with one organisation.
That was very attractive to us. TXC have facilities in all
the major trading centres – London, Tokyo, US – they
cover a vast swathe of FX and fixed income markets. For
us it was essentially a partnership that made sense from an
infrastructure side, a marketing side, the offering side, as
well as investors – and the due diligence they undertake
when they bring people onto the TXC platform helps us as
well. So there are a number of benefits for us and we’re
excited about the relationship.
JR: Is this FD’s first entry into a productised software offering
BC: We’ve been working with the largest investment banks
around the world implementing mission critical software
since 1996. One of the software offerings we work with is
Kdb+. We have a 22% interest in that organisation, and have
been working with them for nigh on 10 years. During that
time, we’ve gained a lot of experience building complex
enterprise systems. What we have done in the last two to
three years is take that IP and turn it into our own product.
So we’ve had our own product out there for several years,
primarily in the market data capture and program trading
space. Cognotec was of interest to us for its FX focus and
expertise, their customers and the ability to quickly enter the
retail and buy side space. So we had two flagship offerings
historically that have been Delta Algo and Delta Stream,
which is our market data capture application. So I guess
we’ve been a software company for two to three years, as
well as our traditional consulting operation.
“Itʼs an uncertain, very confused regulatory landscape,
but I think you will see more fragmentation
in FX and more high frequency firms setting up”
JR: How does FD’s software offering differ from its competitors
BC: One of the differences is that as we build out our
offerings, they all have a common technology base. So,
as opposed to a firm like Sungard that has a portfolio of
products that all have different underlying technologies –
all our products are seamless. They talk to each other and
they can work individually and collectively. Within
themselves, they all address slightly different markets,
but the underlying technology base is all the same. So
that’s one key differentiator. Another is that our offerings
very much have a common target in terms of data. Data is
our speciality and we’re dealing with organisations that
are dealing with very high volumes of data, very high
throughput and the need to process that very quickly.
Low latency is one of our differentiators. Couple that
with productivity and we can get our offering to market
very quickly. So we have a rich offering which is very,
very fast, competing with massive volumes of data –
nobody can deal with the volumes of data that we can and
that’s because we use Kdb+ as our underlying
technology, which is proven and effectively the market
leader in dealing. Because our technology is built on
Kdb+, we naturally inherit the unique advantages that
Kdb+ brings to the table.
JR: What other plans exist in terms of enhancing the existing
offering
BC: On the margin side, we have a number of significant
offerings, as well as plans in the offing. We are embracing
the latest technology in terms of mobile trading and trading
through apps, expert advisor and better graphical interaction.
We are also improving our offering in terms of latency
monitoring applications and back testing. We are going to be
partnering with some pretty significant data providers to
provide historical data for people to back test their models
against.
JR: What are the keys to continued growth
BC: I see continued growth as a function of the
fragmentation of the market, increasing focus on FX
aggregation in that there are more sources of liquidity than
there have been before, which makes smart order routing and
CEP aspects more complex. From our perspective, that’s
where the growth is going to come from. There’s going to be
more discreet operations trading in the market, more sources
of liquidity and the regulation is going to force people to
produce more reports, more granular analysis of data and
reporting of data in terms of transaction cost analysis. From
our perspective, the increased amount of data, drive for lower
latency, fragmentation of liquidity and drive for more
operations, should give us a bigger market to sell our
products and services to.
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JR: You mentioned commodities earlier, is this a focus for
FD
BC: There’s definitely demand, especially on the retail side.
So there will be more offerings on the retail side, precious
and base metals, energy, softs and ags as well. One of the
prime drivers in our technology roadmap is to allow us to
seamlessly deal with those asset classes, even cross asset
trading is becoming more prevalent. There are opportunities
in certain countries with currency restrictions, where we can
combine retail FX trading with underlying commodity
trading; so expanding in the FX arena is something we’re
very cognisant of and which our technology roadmap is
going to allow us to open up to our customers.
JR: What other key areas do you see for growth
BC: Data, driving lower latency, moving into more asset
classes, increased requirements for reporting and transaction
and risk management, as well as FX aggregation because of
the different numbers of price makers and venues that are
emerging. ■
Brian Conlon is chief executive officer
and founder of First Derivatives. He has
worked in the capital markets sector
since 1990. Having trained with KPMG
before joining the risk management
team in Morgan Stanley International,
London, he then joined Sungard as a
capital markets consultant. During his
time with Sungard, Conlon worked with more than 60 financial
institutions worldwide. He left in 1996 to set up FD.
FD is headquartered in Northern Ireland and has additional
offices in New York and London. FD’s services include
consulting, support, technology and third party products. The
company offers a range of software products in its Delta Suite,
including algorithmic/program trading, market data services,
risk management applications and market data management
software.
In addition to organic growth, FD has acquired several high tech
specialty companies in recent years. In October 2009 it bought
New York-based reference data management company,
Reference Data Factory (RDF). The firm also has taken a 22%
interest in Kx Systems, a California-based firm that sells a highperformance
and time series analysis database, Kdb+. At the end
of March 2009, the firm acquired Australia-based Lepton
Solutions (trading as Hologram), which is now trading as First
Derivatives Pty Ltd. The firm acquired Cognotec in mid-
February 2010, and six months ago, acquired LakeFront Data
Ventures, a boutique data management company.
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