Funds Up Their A(lpha) Game with Trading APIs

Scalable and flexible SaaS technology is making automated trading a simpler and affordable way to maximise returns.

Generating market-beating returns, or alpha, increasingly depends on the speed with which fund managers can digest and act upon new information in volatile markets. In today’s digital age, with its overabundance of financial data and where a single tweet can trigger volatility, that response most often needs to be instant.

The need for speed has spurred a steady growth in the adoption of automated trading systems to implement highly complex investment strategies with the help of Application Programming Interface (API) software. Trading APIs enable fund managers to instantly pull and analyse vast amounts of data from myriad sources and link them to multiple brokerage platforms to simultaneously execute automated multi-strategy trades across asset classes.

NO LONGER JUST FOR QUANTS

Despite the widespread adoption of technology in financial markets, for quite some time trading APIs were almost exclusively developed and used by quantitative and systematic funds that rely on mathematical models, statistical techniques, and automated algorithms to make investment decisions and execute trades. The complexity and high cost of developing proprietary APIs made them less appealing to traditional discretionary funds that use fundamental analysis and human judgment to develop and execute investment strategies. However, APIs are now starting to find favour even among the latter who are either adding API pods or starting new quantitative or systematic funds to maximise alpha.

The key drivers of the trend towards trading APIs are lower cost barriers to entry and the ease with which APIs can be customised to serve multiple objectives, along with the advent of ever-more complex investment strategies. Multi-strategy investing combines a range of uncorrelated strategies to generate profit regardless of where the markets are and how volatility impacts different asset classes. Such trades are challenging to execute without automation and APIs.

SaaS EFFECT AND CHANGING MARKET STRUCTURE

First off, cloud technology has enabled companies to develop and offer trading APIs using the software-as-a-service (SaaS) model at a significantly lower price point than proprietary tools. With more affordable SaaS-based APIs, funds can effortlessly retrieve data in a usable format from any number of stock exchanges without having to write complicated code, and also easily share data with clients, vendors, and employees. Given the increased focus on compliance, APIs can also be linked to internal compliance engines to ensure trading adheres to rules and regulations, both, within and across jurisdictions.

The other important factor is the changing market structure. The abundance and high frequency of market-moving data and news, along with market volatility is making automation more a necessity than a choice. Automation is fast becoming a top priority for funds, not simply to save costs but also to effectively re-deploy manpower to higher value work and leave the data crunching to computers. Besides seizing fleeting investment opportunities hidden under mountains of data, automation and APIs also aid risk management by exiting bad trades quicker.

CHOOSING THE RIGHT API

As more funds in Asia and Europe look to follow their U.S. counterparts in adopting automation, picking the right API is crucial because not all APIs are the same. They even speak different programming languages. APIs best suited to simultaneously trade equities, derivatives, fixed income, and currencies globally have three key attributes.

Ease of integration: Multi-strategy investing requires APIs to be fully integrated within a fund’s proprietary technology stack. Language-agnostic offerings using REST API, for example, are easy to integrate and allow users to plug in and seamlessly execute trades.

Platform independence: APIs must enable users to access a large number of brokers without having to build a dedicated link to each one of them. Broker-neutral APIs normalise the flow of information between funds and brokerage platforms, allowing seamless multi-asset trading through a common pipe.

Global footprint: The infrastructure backbone of an API is as important as its quality. While fund managers trade assets globally, orders are processed locally in each region. APIs that are supported by a network of data centres and helplines across the world enable faster trade execution with minimal latency.

TradingScreen’s APIs embody these key attributes and have witnessed 50% growth in adoption among existing clients over the past two years. Additionally, many smaller funds setting up shop are choosing to have our SaaS-based APIs in place from the very outset to gain the desired speed, flexibility, and infrastructure support without compromising the secret sauce that generates their alpha.