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Liquidnet Using Coral8 for Market Surveillance

  • June 9, 2008
  • Katherine Heires

Liquidnet is tapping Coral8’s complex event processing (CEP) engine to perform what the alternative trading network’s chief information officer, Kevin Lupowitz, calls “lifeguard duty,” ensuring that activity remains anonymous and safe from predatory practices.

According to Lupowitz, the buy-side block trading platform is employing technology from Mountain View, Calif.-based Coral8 to monitor trades and identify suspect activity in real time. Older systems only offer end-of-day monitoring capabilities, he noted, adding that Liquidnet has for ten months been using the CEP engine but is only now making it public.

Alfred Eskandar, global head of corporate strategy at New York-based Liquidnet, said that since the network’s inception in 2001, a team of about five people dedicated to surveillance has ejected 91 customers due to trading rule violations. However, CEP has helped spot questionable patterns more quickly and easily, he said.

“As the markets have become very complicated, automated and algorithmically driven, it’s important to have equal processing power to monitor executions and provide surveillance,” said Eskandar.

As an example of behavior that CEP can catch, Lupowitz noted that Liquidnet requires that members act on at least one of every two large blocks made available to them. Inactivity on the part of a member stifles the network’s benefits, frustrates other participants and can be a sign of misuse, he said. The technology is also helpful in spotting members who use orders to expose positions held by competitors and then fail to honor the revealed match.

Liquidnet tested ten different CEP platforms before selecting Coral8’s, according to Lupowitz, who cited its ability to detect and concisely define complex patterns as a key selling point. Coral8’s use of the SQL-like continuous computation language was also attractive. In contrast to many CEP platforms that use proprietary languages that can limit the number of active users within a firm, SQL is familiar to a broad base of developers and business users.

“A language based on SQL became very important to us because it opened up the potential user base of the CEP engine to people outside of the firm’s development group,” said Lupowitz, which allows the technology to be used for business intelligence purposes, for example.

John Morrell, director of product marketing at Coral8, said that customers such as Liquidnet are also attracted to the system’s built-in features: “We automatically take care of delayed and out-of-order messages--it’s under the covers on our platform and it doesn’t require extra coding.” He also noted that the platform can be integrated with a variety of messaging platforms and scaled up to manage increased trading speeds and data volumes.

Coral8 is providing similar technology to two other trading platforms, added Morrell, and is “talking to at least four or five other firms--it’s an actively growing universe.”

Earlier this year, Turquoise, the consortium-backed European platform expected to launch in September, said that it had hired Progress Software Corp.’s Apama division and consultancy Detica to develop a real-time market surveillance system. CEP technology provider Apama and Detica have also developed a trade monitoring platform for the U.K.’s Financial Services Authority.

Adam Sussman, director of research at New York-based Tabb Group, said that while the growing use of CEP by trading venues for monitoring is a positive development, it is not a silver-bullet solution. “Does the CEP platform know what front-running is? Does it know when a trading network’s rules have been broken?” he said. “You still have to have the right kind of human awareness of what is going on in a given market and then be able to correctly program that logic into the CEP.”

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