Case in point: recently, a customers of ours (PhaseCapital, a Boston-based quantitative
investment advisor firm), was interviewed by Waters magazine about their business. PhaseCapital’s CEO, Eric Pritchett described their approach to the arcane world of electronic trading. In his story I saw reminders of good lessons of innovation and entrepreneurship in an industry many outsiders view as troubled and failing.
#1 – Troubled economic times make new business models a source of fresh innovation. In the capital markets, the old school model of trading is based on prime brokers who provide services to the buy side (hedge funds). The service those brokers provided, in Eric’s words, were “flying [buy-side trading clients] around to conferences to meet with CEOs and give them access to analyst reports [for stock trading guidance].” New school buy-side firms are beginning to disintermediate brokers from trading decisions.
PhaseCapital is a case in point – they have their own ideas on what to buy and sell. As a result, new school execution brokers like Lime Brokerage “use their commission flow to pay for useful technology resources that [we] would otherwise have to build.” The changing business relationship between the client and execution broker provides business-model innovation: lower-cost, higher value service to buy-side firms who focus on high-frequency trading as a differentiator.
#2 – Reliance on black-box technology can limit innovation. If everyone uses the same tools, where do you get your advantage? Pre-built applications, or black boxes are good for business functions where innovation is limited (such as accounting, HR, etc.). But technology that empowers a firm’s competitive differentiation can benefit from a white box approach to technology. A white box is like using Lego’s to build a unique system. Mr. Pritchett cites StreamBase as an example of getting the white box approach right by providing the basic building blocks they needed to build their trading system quickly, but don’t introduce “too much abstraction” from their differentiated ideas.
#3 – Open source that’s ready for prime time can disrupt. In the capital markets, technology that drives down the cost of trading can be disruptive. PhaseCapital uses QuickFixJ the open source implementation FIX (a standard for trading information exchange between banks and clients) for its trading operations. But being for standards is like being for world peace — getting the right standards at the right time (when they’re ready) is where the rubber meets the road. Eclipse is ready. Open source FIX is ready. Open source technologies, picked when they’re ripe, can reduce cost and maintain quality, and be disruptive against firms with older, more expensive infrastructure.
#4 – Decision-making speed can be disruptive. The need for speed is insatiable in the capital markets. A long time ago, most opportunities lasted for minutes. Now, with automated trading, some last for seconds; some last for milliseconds; some last for microseconds. CEP helps firms make decisions while they still matter. Mr. Pritchett described it in technical terms: [Lime and StreamBase] deliver “a strong deployment platform for low-latency trading operations.” Traditional database technology is designed for decisions that take hours, days, or weeks. CEP is designed for decisions that that take seconds, milliseconds, or microseconds. The faster a business moves, the faster it can seize business opportunity.
#5 – Describe your focus in 23 words. It’s easy to say that focus is good. It’s easy to note that lasers (focused light) are more powerful than light bulbs (defused light). Yet the hardest job I have as a CEO of an entrepreneurial enterprise is to focus. It’s hard to decide what not to do. Eric’s description of PhaseCapital’s organizational uniqueness was razor-sharp, and a great example of organizational self-awareness: “[Our strengths are] signaling, opportunity identification, position sizing, risk process and in realizing the alpha opportunities that we are trying to harvest through high-frequency trading.” Can you be that clearly focused about your strengths in 23 words?
#6 – Bet boldly on promising ideas. PhaseCapital bet boldly on automation. And therefore they bet on an entirely automated infrastructure, and new technologies that enable automated trading as opposed to traditional click trading, where traders push the button to buy and sell. StreamBase and Lime Brokerage were their bets for technology, and they’re building a complete system, including algorithmic trading, smart order routing, market data management, for both equities and foreign exchange.
#7 – Quickly land -– then expand. PhaseCapital bet boldly, but they didn’t try to build Rome in a day. Innovators know that you must set and stick to a vision, but that you have to constantly learn along the way. Innovation comes interactively — instead of taking four years to build it all, they set a quick target: trade a subset of the S&P500. They landed that goal. Then expanded to the next step: the entire S&P500. Then to foreign exchange. And so on.
#8 – Entrepreneurs need entrepreneurial partners to succeed. Innovation is a mindset, and entrepreneurs are more successful when they partner with other firms that get it. Our customers often tell me they buy our software because our company thinks like they do. It’s the little things that make it work -– engineering-to-engineering communication, direct CEO involvement and sponsorship, creative business deals and contracts. PhaseCapital worked closely with us because that’s the way we like to work with customers. That shared mindset makes for good partners.
Even though the pulse of the U.S. economy might be a bit shallow, PhaseCapital proves that the heartbeat of innovation and entrepreneurship is strong.
7 Responses to Eight Lessons for Entrepreneurs – A Case Study Based on PhaseCapital
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Hello Mark
Interesting article. In relation to your point 3 and the CEP market, where do you feel Esper fits? Is an OpenSource CEP engine now a credible offering for the market?
Thanks
Hyder
Hi Hyder – Good question…. quickly stated, no, I don’t think open source CEP is a credible offering for the market today. Naturally, given my bias as the CEO of a commercial CEP platform provider, you would think I would have that view, so I think my opinion requires explanation.
*Why* is Esper not a credible offering? Esper, from what I know, is a lightly resourced, developer CEP toolkit. It doesn’t contain the graphical development environment, debugging tools, testing tools, threading support, HA, or management features that a serious enterprise development staff would require to put a serious application into production. Since the majority of the CEP market lies in either trading applications or intelligence applications, it’s easy to see why Esper hasn’t gotten traction – mission critical deployments demand serious corporate backing.
That said, a few notable software companies have forked Esper and used it as the basis to embed CEP functionality it in their larger enterprise software stacks (e.g., BEA. But I believe the recently turned away from it). As a starting point for building a software platform, I guess it would be useful. But as a stand alone, bet-your-business software offering without a major commitment to maintain and extend it? Not an option for any serious company.
That’s not to say that open source won’t be a credible option someday in the CEP space. Just not for the next few years, and not without strong commitment from the community.
Mark, I believe that several facts you mentioned about Esper are not correct. It, in fact, does have “graphical development environment, debugging tools, testing tools, threading support, HA, or management features”.
True, some of them are offered as a commercial offering by EsperTech, but they do exist.
Also true that EsperTech is not a company with “serious corporate backing”, but it’s an option if you want to use CEP capabilities with some basic support in non-mission critical apps at a fraction of a cost of the bigger commercial CEP vendors such Streambase.
In terms of Esper not getting traction, I don’t think there’s a basis for saying that – I would argue that Esper has many more deployments that any commercial CEP engine – exactly due to the Open Source nature of it.
- Ed Y.
Thanks for the clarification, Ed, but I think you have actually confirmed that my statements *are* accurate, because I wasn’t referring to the commercial extensions that might be available for Esper, I was talking about what I know of the open source product. If the question was “is EsperTech, and their commercial extensions to Esper, a credible source,” then that’s a different question, and I think we both covered that one. To put it another way, I’ve seen fewer than 10 serious competitive situations where Esper or EsperTech was involved, and only one commercial selection of it, over 5 years (both here and Apama).
As for commercial deployments, I guess we’ll have to take your word that there are many Esper deployments, because I couldn’t find a single reference to an Esper deployment on the EsperTech site, and their community / message boards have volume in the past 3 months that our support group handles in a day. Perhaps there is a ground swell of use for very simple CEP applications. If there is, then I’m happy about it, because firms that take a cursory look at Esper and play with it tend to be good prospects for our firm when they get serious about CEP.
But thanks for that clarification, Ed.
This article covering open source products making their way into the front office is a good follow-up regarding the Esper deployment point.
http://www.wallstreetandtech.com/it-infrastructure/showArticle.jhtml?articleID=217400216
Now this is interesting! I have never come across anyone who tries to attempt to describe their focus in 23 words! What a huge challenge!
This is a good tip on how we can make the best out of everything especially in engaging in business. Having the best lessons in entrepreneurship, we ought to be on the right road. There are issue about making big in this business we have to have the exact background information. Thanks a lot for sharing it with us. More power.