Wall Street Opens Doors to Open Source Technologies
The recession combined with access to a worldwide community of developers is driving capital markets firms to adopt open source technologies in increasing numbers.
By Ivy Schmerken
May 11, 2009
To read about CME Group's experience with open source, see: CME Group Dives Into 'Coreboot' and Other Linux Open Source Projects
With the financial meltdown eroding IT budgets, large investment banks, hedge funds and other financial institutions have been forced to rethink their attitudes toward open source technology. Use of open source technology is quietly booming in the capital markets because of increased cost pressures, and analysts predict the current economic conditions will drive further industry adoption.
"Financial services firms are taking a different look at open source technology now that they are financially constrained," comments Lloyd Altman, a senior executive in Accenture's capital market's practice. Altman and others suggest there is now a corporate IT mandate to consider open source technologies as a way to save money and reuse existing technologies.
While banks and brokers have been running open source applications in the back office, including Linux and the free Apache Web servers, open source solutions now are finding their way onto the front-office trading desk. "What the crisis has done is shattered the orthodoxy in what is [accepted as the correct way to build out systems, and it has allowed people to think more creatively about how their software works," comments Graham Miller, co-founder and CEO of Marketcetera, an open source platform for building automated trading systems.
And while open source software has faced scrutiny -- over security and support concerns, for example -- some large Wall Street institutions are integrating the technology into their IT environments wherever possible, says Miller, who quickly adds that firms are only doing so in cases where they can maintain "maximum flexibility and control over their trading systems."
Amid the trend, Esper, an open-source event stream processing and complex event processing (CEP) solution, is gaining popularity on the Street. "You download it and you learn it. It comes with documentation," explains an industry source who is involved in the development of trading systems at a major investment bank. He points to several advantages of the open source software: "Esper is already built. Instead of being a standalone server product that runs as a separate product, it's a library that you link in with your own proprietary stuff. That way you don't have to worry about another additional process."
Many Wall Street IT developers and quants are participating in open source technology projects. Some of the largest investment banks -- including Morgan Stanley, JPMorgan and RBC Capital Markets -- use Eclipse, an integrated development environment (IDE) for Java, to develop fixed income trading systems, for example.
"It's kind of like creating your own Visual Studio, which is Microsoft's visual development environment, and the Eclipse framework allows companies to do that for their products," says Adam Honore, senior analyst at Aite Group, explaining the platform's popularity. "You can manage multiple applications from an Eclipse framework from a single integrated development environment."
In another example of Wall Street embracing open source ideals, earlier this year JPMorgan contributed a calculation library for credit default swaps to the International Swap Dealers Association for the good of the world, notes Accenture's Altman.
One of the more popular open source projects among the financial services industry is the Advanced Message Queuing, or AMQP, Working Group, which is collaborating on specifications for messaging infrastructure. Firms including Credit Suisse, Goldman Sachs, JPMorgan Chase and Deutsche Borse Systems participate in the open source AMQP Working Group and collaborate on standards for messaging infrastructure. Vendors in the low-latency middleware area -- including Tervela, 29 West, Solace System and Microsoft -- also have joined the project.
Free Innovation
"AMQP is not just a financial services [project], but it's something that has been taken seriously in the financial services space," relates Kevin McPartland, senior analyst at TABB Group. Open source "is a space that's growing generally, and I think financial services is more and more starting to see the benefits. And if anything, the tough economy has opened the growth of open source. You get your base products for free, and you're essentially getting innovation in that product for free, because people are contributing and improving the software all the time."
In fact, some of the new commercial open source vendors claim there's no way the proprietary vendors can keep up with the open source community. "People realize now that the open source project -- which really has worldwide buy-in from top experts from whatever field -- is perhaps a more secure and future-proof method of development than going with a proprietary vendor who can never keep with the worldwide community," says Colin Magee, VP sales and marketing at Revolution Computing, an open source predictive analytics platform for developing with R, the statistical modeling language.
There are many reasons, experts suggest, why open source technologies are becoming pervasive among capital markets' firm, including the need for transparency in source code, flexibility to integrate with existing applications and access to the intellectual smarts of a worldwide developer community.
"People don't really want to get boxed in to proprietary technology," says Adam Honore, senior analyst at Aite Group, who cites the Java Messaging Service (JMS) and Common Web Services for access to business functions or data as examples of powerful open source technologies. "You're not worried about proprietary APIs [application programming interfaces]. If something comes along, it's easier to plug and play. I think that's one of the big drivers now."
Cost Is Main Driver
Still, industry sources agree that cost is the No. 1 driver behind open source's momentum. "With all the banks and hedge funds cutting back on expenses, that's probably the most important reason, especially since some of the major vendors have ramped up licensing fees," notes the trading system developed who requested anonymity.
"If you look at the appeal of open source, it's low cost, and in this environment that's huge," says Brennan Carley, managing principal at Proton Advisors, an independent consulting firm for the financial services technology and telecommunications industries. Carley, who has held senior C-level positions at Reuters, BT Radianz, NYFIX, Instinet and Warburg Pincus, recently joined Marketcetera's board of directors.
Rather than build an algorithmic trading system in-house or buy an off-the shelf-system from a vendor that requires costly and lengthy customization, Carley says, users can download free components available from Marketcetera. The idea, he explains, is that there are core pieces of the infrastructure that do not provide competitive advantage and can be shared, allowing firms to build their value-added strategies on top of that.
"We've built out a platform product that provides out-of-the-box components for market data, signal analysis engines, market connectivity and user interface capabilities to exchanges, ECNs, brokers and lots of different destinations," says Marketcetera's Miller.
The San Francisco-based firm launched Version 1.0 of the Marketcetera Trading Platform, which can be downloaded free-of-charge from its Web site, in January 2009. Emulating the strategy of Red Hat, which provides fee-based service and support to Linux, Marketcetera offers licensing agreements for support and maintenance. The company integrates several open-source technologies that are already well-known among trading techies, including QuickFIX/J, a messaging engine for the FIX protocol, and QuantLib, a free library for quantitative finance. Marketcetera also uses Esper.
"QuickFix is the open source FIX engine or FIX library that would compete with NYSE Technologies' TransactTools or [Orc Software's] CameronFIX, [both of] which are commercial FIX engine that you can license," says Accenture's Altman, who declines to recommend one approach over the other. "There's the caveat: Do you need an open source solution that's been certified to run under different transaction loads, or do you want to hire a company [e.g., NYSE Technologies or Orc] that can customize it for you?"
But regardless of its promise, Altman suggests, open source code won't be as prevalent in the capital markets as it is in in other industries while Wall Street firms cling to the idea that any software they develop is proprietary and is a competitive advantage.
The Pitch
Marketcetera executives, however, report they are seeing an increase in demand from financial institutions of all sizes, including start-up hedge funds both in the U.S. and overseas. "The economic environment is driving interest from all across the board," the firm's Miller says.
Comparing the aftermath of the credit crisis to the late 1990s dot-com bust, Marketcetera CTO Toli Kuznets says, "IT budgets are smaller -- all of a sudden you have to do more with less and build the applications fast."
Adds Revolution's Magee, "Another factor making financial service firms more comfortable is that the open source model is mature now -- Red Hat is a decade old." According to Magee, Revolution is developing a commercial-grade R language platform that can be used for computational finance and statistical arbitrage trading. The firm's customers include Bank of America and some of the world's largest hedge funds that are doing mathematical modeling with R, he says.
Magee notes that while the R language is increasingly being used under the hood at hedge funds, asset management companies and investment banks, it's not necessarily the standard modeling platform. "Our proposition basically enables people to bring it out from under the hood as their main development platform," he claims.
As Red Hat did for Linux, these commercial software companies are providing enterprise editions of open source technologies that promise high availability, failover and scalability to handle larger data sets. And the open source firms say they also offer more flexibility than proprietary vendors in terms of customization.
"The key differentiator with a proprietary platform is you're limited to the kind of usage and the kind of customization that the vendor has forethought," asserts Marketcetera's Miller. "If the vendor lets you change the fonts and colors on the EMS, then that's the limits of the flexibility on the systems, whereas an open source offering is really unlimited on what you might integrate with it and what features you might be able to add."
No Free Lunch
Despite providers' claims, some experts, pointing to integration challenges, question the notion that open source technology is cheaper than building in-house or buying packaged software from vendor.
"Don't view open source as 'free,' " warns one industry source with a large financial services institution. "A lot of the open source products have a basic version [but you need the fee-based] enterprise version that comes with support, high availability and additional feature sets."
Aite's Honore cautions that custom development of open source software can be more costly than proprietary software. "It might look cheaper on paper," he say, "but if you look at what you want to do with it and it requires a substantial engineering effort rather than a commercial product, then it's not necessarily the most effective solution." He adds that there could be support, maintenance and accountability issues with some open source vendors.
But commercial open source vendors insist that their platforms are more cost-effective than proprietary-software vendors. And, they note, firms can download free versions to explore before committing to anything.
Meanwhile, open source seems poised to take off. The recession has forced firms to revisit budgets and planned projects, and that's forcing them to look at open source, says Revolution's Magee. "If you are a practitioner in finance, there is a wealth of software available in the open source community. Bottom line: It can help you get your job done," he contends.
According to Accenture's Altman, most members of the open source community believe it's to their advantage to leverage others' intellectual assets. "It becomes this community thing -- they're leveraging each other's strengths," he says. "There's a little bit of altruism in it and a lot of practicality. Leverage the common knowledge and you will benefit and give back and it's good business."
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