Trade Talk Blog

Welcome to the official blog of Trading Technologies, your source for professional futures trading software.

Innovate to Sustain Today…
and Disrupt Tomorrow

I was recently reacquainted with the book The Innovator’s Dilemma by Clayton M. Christensen (Harvard Business School Press, 1997). This classic work presents example after example of well-managed, successful companies across various industries, which failed to recognize the future impact of, and subsequently struggled to respond to, newer disruptive technologies.

A typical disruptive technology is initially designed to service a small emerging market, which appears less profitable to the established companies. Over time, the new technology matures to a level where it can move “up market” and become quickly adopted by the larger market before the established companies can respond in kind.

A fresh read on my electronic reader (how’s that for an ironic example of a disruptive technology!) reinforced what Christensen describes, that companies did not fail because of arrogance, laziness or poor management. They failed exactly because of the fact that they were well managed.

They understood their markets, diligently listened to their customers, and worked tirelessly to better meet their customers’ needs. But these seemingly sound business practices directly caused them to miss the “next big thing.”

Folly? Not…

While we naturally tend to focus on more recent disruptions in computer technology, retailing and manufacturing, not all lessons to be learned from history come from modern technology. Buried in a footnote is a mention of Robert Fulton’s steam powered ship, which was initially dismissed (aka “Fulton’s Folly”) with the thinking that it would never compete with the dominant ocean-going sailing ships of the time.

But what the steamship could do well was efficiently navigate the smaller inland waterways and reliably move in the absence of a steady breeze. The inland waterway market was much smaller than transatlantic shipping, but sufficiently large enough for the steamship makers to perfect their technology. Over time, steamship performance improved to where they could circumvent the globe. They were able to move “up market”’ and successfully penetrate transoceanic shipping. By then it was too late for the sailing industry, and not a single maker of sailing ships survived. The steamships ruled the seas.

So how do we learn from and (hopefully) avoid the mistakes from the past? It’s easy to say and hard to implement, but we need to deliberately innovate for both purposes—for today and for tomorrow.

Innovations Come in All Sizes

Not all innovations are as disruptive as the steamship was to the sailing industry, or the PC to minicomputers and mainframes. What may appear to be minor iterative improvements can sometimes greatly optimize current functionality. Larger architectural advancements can significantly improve the performance of existing products and systems.

These so called “sustaining” innovations should always be a necessary component of development focus. In fact, here at TT we spend the majority of our time building these types of sustaining innovations, e.g., working to make messages travel faster and safer, constantly looking to better streamline the user interface, etc. The positive tangible results of these improvements help produce the financial resources and capabilities that a company needs to continue to compete and grow within the marketplace. Without them, a company is doomed to slowly decay.

To identify nascent blips before they mature into a new dominant trend, a non-insignificant amount of effort also needs to be budgeted to focus specific time and research on areas away from the current tasks. Some companies have formalized this process such as Google’s 20 percent time and the McKinney Ten Percent. Intel’s internal resource allocation process is weighted towards each product’s gross margin as a way to automatically self-correct and allocate more resources to the growers and less to the decliners.

Decisions to allocate precious time and resources amongst competing priorities of sustaining work must be balanced against undertaking more risky “skunkworks” R&D-type projects, which may or may not bear fruit. For example, TT is actively exploring cloud and web technologies, in ways that may (or may not) eventually prove beneficial. We tend to think that they will be successful, but actually it really doesn’t matter what we think, as ultimately the marketplace will determine the outcome.

It is very tempting to easily dismiss these side-line projects, since they logically seem at the time as frivolous endeavors that may never be profitable. Until one is…at which time the firms that either ignored or starved investments in those areas find that they suddenly do not have the capabilities necessary to compete in the new area, and quickly lose market share to the newcomers.

Your Ego Won’t Like This

It is easy to agree with the obvious statement that the future winners are not known in advance. But it is much harder intellectually for smart, customer-focused business people to accept Christensen’s claim that not only are the future winners unknown, they are unknowable.

So hedge your bets to protect you from yourself. Continue to innovate on what you know in order to grow with your current clients. But do more than just “keep an eye out” for new ideas, and purposely structure a portion of your efforts—research, planning, prototyping—on small, OK-to-fail side projects. The end goal is to improve the chances that you participate as a future disruptor.

Thanks for reading.

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CFTC Proposal Poses “Monumental Challenge to FCMs”

A rule proposed by the Commodity Futures Trading Commission (CFTC) would require futures commission merchants (FCMs) to maintain “residual interest” exceeding the sum of all margin deficits in customer segregated accounts. Some claim that this proposal will completely overhaul our industry and present “monumental challenges to FCMs”.

If you’re not already familiar with this issue, take a look at this John Lothian Newsletter Special Report and the video commentary posted below. The video includes excerpts from the CFTC roundtable that took place on February 5.

To quote John Lothian: “The meeting led by Robert Wasserman, chief counsel of the CFTC’s Division of Clearing and Risk, included panelists Mike Dawley of Goldman Sachs and FIA chairman and Kim Taylor, President of CME Clearing, who argued that the increased margin requirements under the proposal are substantial. Dawley said the rule, if passed in its current form, would be ‘one of the most monumental events’ in his 30 years in the industry.”

The official comment period for this proposition ends tomorrow, February 15. If you’d like to submit a comment to the CFTC for consideration, you may do so here.

The Next Round of Competition

This post about TT’s new MultiBroker ASP solution by Jim Kharouf was originally published in today’s John Lothian Newsletter. Jim is editor-in-chief of JLN.

Sometimes it is the small innovation or service that changes an industry.

Jim Kharouf, editor-in-chief
John Lothian Newsletter

Trading Technologies (TT) announced last week the launch of a new trading function that allows TT customers to choose which brokers they will route their orders through on its X_TRADER® platform. In other words, if you want to trade 100 crude oil futures, you can route 10 contracts through one broker, 50 to another and 30 to another and 10 to another, all from one trading screen.

This could be a game changer for the futures industry.

This technology is not groundbreaking, as other technology vendors already offer it, from Bloomberg to Realtick to Thethys and Trading Screen. But none of those firms have the futures footprint of TT. And in that sense, the new multi-broker solution could usher in a new era of competition among FCMs and choice for end-users. TT’s multi-broker functionality is in the beta testing stage, and also includes 11 banks, who have agreed to adopt the service including: BofA Merrill Lynch, Credit Suisse, Deutsche Bank, HSBC, J.P. Morgan, Jefferies, Macquarie Bank Limited, Mizuho Securities USA, Morgan Stanley, RBC Capital Markets and UBS.

Why would a broker ever want to be put on a system that could ultimately route order flow away from it? Because that broker believes it is better than the competition. So far, 11 FCMs think they have what it takes to not only keep existing customers but add new accounts as well.

When thinking about the impact of this concept, one example comes to mind. The airline and travel industry, has been massively challenged and changed with the introduction and spread of online travel booking sites such as Orbitz, Priceline, Travelocity and others. Customers have always had a choice of airline, but now individuals have more transparency on pricing and ability to pick the right trip for them. And customers have responded. Orbitz, launched in June 2001, was initially supported by five major airlines and drew 2 million visitors in its first month. Last year, the company said it handled more than 18 million per month.

TT’s solution just offers potential competition and convenience to its customers in a similar way. TT plans to expand that FCM list as the beta testing leads to a full launch planned for this summer.

The question is whether TT’s service will attract more FCMs, particularly Goldman Sachs and Newedge. The other issue is whether TT might take this service to another level – offering brokers a chance to display commissions, discounts or other services that might garner new customers to their platform.

It is a fine line to walk for TT, but the fact that it has created this service and found buy-in from both customers and the solid group of FCMs already is a sign a change in the industry may be brewing.

– Jim Kharouf, Editor-In-Chief, John Lothian Newsletter

Watch Episode 3 of Our ADL™ Hangout Series on Wednesday, January 30th

UPDATE: If you missed our live broadcast of this ADL Hangout, you can view the recording here.

The next Google Hangout featuring our ADL algorithmic trading tool is set for Wednesday, January 30th, at 3:30p.m. CST. Product Manager John Yoo and Senior Business Analyst Tom Zagara will use the If-Then-Else block to build advanced logic for the exit-side order of the scalper algorithm featured in our previous Hangouts.

To watch our live broadcast, visit TradingTechTV at 3:30 p.m. CST on Wednesday. No registration, login or special software is required.

If you missed the first two live Hangouts, you can watch the recordings below.

Episode 1: Build and launch a basic scalper algo. It joins
and maintains a one-lot bid on a given instrument as long
as the bid quantity is greater than 100. When filled, it places
an exit order at one tick higher than the fill price.

Episode 2: Build the exit-side logic to the
scalper algorithm introduced in the first episode. 
In doing so, we also cover the Value Extractor 
Block and the concept of “virtualization”.