Are you considering how to implement a financial trading system for yourself or your firm? There are a tremendous number of places to start, but how do you sort it all out? Most importantly, what are the key considerations to ensure you do it right and end up with a solid system that doesn’t waste lots of time and money?
The first challenge is laying out what you want to achieve on the trading side versus position-keeping, accounting and trade processing. There are a plethora of software platforms available from those less than $200 to massive systems used by global financial institutions. At the beginning you should ask “what do we really need versus want in terms of trader tools?” The answer will help guide the decision-making process as you look at each component of the trader’s tool chest.
Individuals, family offices and small trading firms have a wide variety of strategies to consider. These users don’t necessarily require a financial trading system with every whiz-bang feature ever invented. In fact, fewer features, but ones that are specific to your trading strategies, typically outperform large, complex systems. This is not just because of the cost — fewer features reduces “tinkering” and allows the trader to focus on his or her strategy rather than electronic distractions that undermine discipline. That being said, the ability to implement sophisticated if-then rules and contingent orders is critical to keep up with market variations. The ability to create and manage multiple strategies easily is a mandatory feature. Configurable components provide flexibility. Smaller firms and individual traders also appreciate highly transparent rules and rule builder features.
The main parts of a financial trading system are the trading strategy builder, watch lists, execution methods, price-volume data module, position tracker, P&L reporting and risk analytics. Depending on your needs, two more components to consider are accounting and an OMS. The boundary between your trading, accounting and order management systems is up to you. You can rely on your broker for much of this.
Microsoft Excel is one of the most-used applications for this purpose. Programming trading strategies directly into Excel with VBA code or formulas is achievable with a limited amount of training. A typical trader can learn to do this fairly easily. User controls such as buttons, dropdowns, data entry fields, charts, etc. can be added in a way that mimics the visuals and behavior of more expensive software platforms. You can automatically import market data (prices, volume, volatility…) for use with technical indicators. Basic if-then rules, with statements and loops can be used to create elaborate or simple strategies. Excel’s statistical calculations are a great add-on. Sophisticated analysis can be done before and after the trade. These are why Excel is so widely used by Tier 1 traders, despite the fact they have the most elaborate trading systems available to them.
For smaller firms, trading execution directly in the market with a financial trading system is the responsibility of your broker. At a bank trading desk, orders are typically routed through the bank’s OMS for direct execution or sent to electronic markets and liquidity pools. Excel can be integrated via APIs to send a variety of order types.
Market data management, position management, profit and loss analysis, and risk management are separate specialty areas where you can buy different components and integrate them, or buy a complete middle or back office system to handle. Market data management requires specialized infrastructure to handle large volumes and massive speed requirements. Positions, P&L, risk, and accounting all rely on complex computations and are best handled together.
If you’re planning to implement a financial trading system, Excel is likely to become a major part of your trading operation. Hopefully, these insights will help make the right decisions for your trading success.
To learn more about building a financial trading system in Excel, visit ExcelTradingModels.com