Open source potential in capital markets

When I tell people about OpenGamma, reactions are often incredulous.

We’ve built a full market risk analytics platform for capital markets—with all the bells and whistles you’d expect, such as a declarative calculation engine, a flashy HTML5 GUI, and a comprehensive analytics library—and we’ve released it under the Apache 2.0 License. And, our key customers and users at the moment are some of the world’s most secretive technologists: hedge fund managers. To an outsider, this may look like a curious combination.

I’ve worked for or with hedge funds for the last 9 years, and in the last 3.5 years since starting OpenGamma, we’ve identified some unique challenges in executing open source technology and philosophy in this space. I’ll outline some of those challenges and what that means for software companies eager to do business with capital markets participants.

Open source is a natural choice

Hedge funds are super secretive—so much so that we are not usually even able to name our clients. (This naturally makes our sales process slightly more complex as we have to describe our customers in general terms but can’t name them in public. It’s comforting to know, though, that every other vendor in this space is battling with the same issue.) You may be surprised to hear this, but most hedge funds use plenty of open source software already.

Examples include Linux, PostgreSQL, ActiveMQ, OpenJDK (and all the various Java libraries you’d expect like Apache Commons, Spring, etc.), and so on. In fact, many of them don’t use any traditional closed source infrastructure software at all. For example, there’s a lot more PostgreSQL and MySQL than SQLServer and Oracle in hedge funds. They are also often early adopters of any form of technology they think will give them an edge—so, we tend to see NoSQL way more in hedge funds than in banks, whether it’s MongoDB, Cassandra, etc.

Not surprisingly, these days, most of those start out using open source software from Day 1. What does distinguish hedge funds from the typical open source user, however, is that they seldom (if ever) contribute openly back to projects. They are worried (perhaps rightly so) about any of their secret sauce (the alpha-generation capabilities) leaking out. This either means that they are raw consumers of open source (they download anonymously and never contribute to the community) or they work with commercial firms to represent them in the open source ecosystem.

This could be a vendor, like us, or a consulting firm; in both cases, this representative will provide the fund with a confidentiality shield. Hedge funds are aware of course that not everything they do is alpha generation. The problem is, they don’t always know what it is that gives them an edge and what doesn’t. It’s our job as an open source vendor to help them along the journey to identify the best ways to participate in the community. 

This all has implications on technology companies and developers that want to do business with hedge funds or other secret capital markets trading firms.

How to work with hedge funds:

1. Focus on things that don’t generate alpha. We founded OpenGamma after a realization that much of the risk technology we were building in our hedge fund jobs was pure plumbing. Each firm was writing the same code internally and wasting precious development resources on functionality that could be easily provided by open source software instead. If a hedge fund believes something gives them an edge, they are sure to develop it in-house—for example, high-frequency trading shops running customized Linux kernels—but for everything else, open source is the natural answer.
2. Provide a confidentiality shield. Hedge funds are often more than happy to talk to each other, but not the wider world, for various compliance reasons. Therefore it’s important that you provide communication channels and commercial contracts that allow your clients the level of confidentiality they require. At OpenGamma, a lot of our clients participate in our Customer Council, providing feedback and advice to our R&D team—but, they regularly speak to each other without our involvement too (which keeps us on our toes!). Providing that behind-the-scenes guidance is one way that hedge funds can actually contribute back to open source projects without having to reveal their identity.
3. Constantly demonstrate value for money. Whilst hedge funds manage a lot of money, they’ve been hit by lower margins just like everyone else since the 2007 turmoil in the financial markets. A lot of them are cash sensitive, especially start-up funds, which means you need to be able to show how your solution helps them lower their total cost of ownership in the long run, and that you are providing real value that will have an impact on their bottom line. As well, open source technologies are great for startup hedge funds, who often don’t have a serious technology budget until they reach at least $250 million in assets under management. In the past few years, there has been a noticeable increase in the number of people within the industry who 'get' open source and understand the impact it can have on your bottom line.

There are certainly some unique challenges that any firm wishing to do business with hedge funds will need to acknowledge, and tackle, in order to become successful. But the interest and commercial demand we are seeing for our own solution leads me to believe open source has huge growth prospects in capital markets.