The Open Road

Open source has long flourished on Wall Street as financial services firms have sought competitive differentiation by tweaking open-source software for enhanced performance and functionality. Wall Street was the first sector to buy heavily into Linux, and it has also welcomed a host of other open-source infrastructure projects.

Indeed, Wall Street adoption has reached the point, in the words of senior Accenture executive Lloyd Altman, that open source has become a mandate for cash-strapped financial services firms tasked with doing more with less.

I've seen this in my own business: open-source applications are suddenly the less risky choice, given the need to get more for less.

But the more dramatic shift for Wall Street right now is that it is considering open-source alternatives for fundamental, industry-specific applications, applications like Marketcetera's open-source trading platform, which I've called "a lifeline to the hedge fund industry" because it enables the industry to become more efficient and more productive. REvolution Computing, Esper, and others are also benefiting from this shift.

Cost may be a primary driver for the shift to open source, but as the managing director of Technology Risk Management at Bank of New York Mellon told me, open-source software has become the innovation platform of choice for financial services companies.

Marketcetera's Graham Miller explains this concept as it relates to his company's trading platform:

We've built out a platform product that provides out-of-the-box components for market data, signal analysis engines, market connectivity and user interface capabilities to exchanges, ECNs, brokers and lots of different destinations.

The key differentiator with a proprietary platform is you're limited to the kind of usage and the kind of customization that the vendor has forethought. If the vendor lets you change the fonts and colors on the EMS, then that's the limits of the flexibility on the systems, whereas an open source offering is really unlimited on what you might integrate with it and what features you might be able to add.

In other words, open-source tools like Marketcetera's put the customer in the driver's seat, and charge a lot less for the privilege. This is a recipe for success in any economy, and particularly in this recessionary economy.

Wall Street was an early adopter of technologies like Linux, JBoss, and more infrastructure software, and has been a key constituency for open-source applications. As it signals a move to replacing core, industry-specific business applications with open-source alternatives, is it also foretelling a macro move by other industries to vertically focused, open-source solutions?

I suspect the answer is "Yes."

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This week Marketcetera announced general availability of its Marketcetera Automated Trading Platform, an open-source platform for hedge fund traders. I wrote last week about Marketcetera's seemingly odd timing, creating a trading platform for hedge funds just as they've fallen off a financial cliff.

But in talking further with Marketcetera's Roy Agostino, chief marketing officer, and Graham Miller, chief executive officer, I'm increasingly inclined to believe that the company couldn't have timed its market entry more perfectly.

Consider that the company's Web traffic is up over 300 percent since January 2008, suggesting growing interest in the company's products. More important to revenue, however, is the statistic that registrations (for white papers, etc.) are up over 400 percent year over year. These are people that have more than a passing interest in Marketcetera. They're potential buyers.

I asked the Marketcetera executive team what is driving the interest in its open-source trading platform, and heard three themes that resonate across the open-source spectrum:

1. Total cost of ownership. Hedge funds and the other large financial institutions are trying to drive down their costs, especially in the wake of the biggest financial meltdown since the Great Depression;
2. Vendor lock-in. Agostino suggested that money managers are increasingly frustrated with being locked-in long-term to their Order Management System (OMS) vendors, especially when it's become common practice to demand hefty professional services fees just to make the proprietary OMS suitable to a hedge funds day-to-day requirements;
3. Control and flexibility. Hedge funds view technology as a competitive differentiator, and many have discovered that proprietary OMS offerings simply don't give the flexibility to tweak the OMS to fit their requirements. Hence, they have developed their own OMS in order to get the flexibility they want, but open source gives them the ability to start with a robust platform and fine-tune the last 10 percent or so of their requirements.

I've blogged about Marketcetera before, a cool open-source hedge fund trading platform. Later this week I'll be posting an update after I interview the Marketcetera team, but keep bumping into stories that make me wish the interview were today, not Thursday.

For example, Businessweek recently offered up an opinion piece from a San Francisco-based hedge fund trader, who argued for an open-source trading platform:

After headcount, a typical hedge fund's largest expense item is technology. Much of that expense goes to the trading systems that we use. Let me tell you a secret: Our "secret sauce" is our trading strategies--it's not our systems for trading. These platforms can cost even a smaller fund like mine hundreds of thousands or even millions of dollars a year. Look, I just need a trading platform that executes our strategies. The software needs to connect to other systems that our different brokers and exchanges use and complete the trades driven by our increasingly automated strategies. This trading platform market is probably a $1 billion annual industry today.

It's also exactly what Marketcetera already offers. Has the Marketcetera team called this guy? I'm hoping the answer is 'Yes.'

Computer Business Review recently went into detail on the Marketcetera trading platform, calling out its high download numbers and promise for the hedge fund industry. For those who think that hedge fund traders can afford to waste money on expensive, bloated systems, this article offers good reason to believe otherwise.

In this environment, no one can afford to waste money. It doesn't grow on trees or hedge fund trading desks. But I believe Marketcetera is well poised to help hedge funds trade more efficiently and, hence, make more money with fewer resources. Yes, even hedge funds need to do more with less.

I can't wait to talk with the team later this week.

Most lists of "companies to watch" are put together by the PR firms that shout loudest to the writer. "Ten open-source companies to watch" by John Fontana over at NetworkWorld, however, strikes me as pretty interesting, on balance.

It's also a great testament to how far we've come in open source, because many of the companies listed are doing interesting, cutting-edge work.

Take Marketcetera, which is building a next-generation platform for hedge fund managers. Or Kickfire, which has built a super-charged MySQL appliance. And so on.

No, he doesn't profile Zimbra, Red Hat, Alfresco, MySQL, SugarCRM, MuleSource, etc. He doesn't have to: the market is already gelling around these companies. Fontana is identifying rising stars. While I would quibble with a few of his choices, overall it's a great list.

Open source is growing up without growing old. Fontana does a good job of capturing some great examples of this. Have a look.

Marketcetera just announced a $4 million series A round of venture funding with Shasta Ventures and Jack Selby, managing director and co-founder of Clarium Capital. There's something highly appropriate in a hedge fund investing in a software company set up to help hedge funds (and others).

Marketcetera, as I've opined before, is one of the coolest open-source companies on this planet. It provides an open-source trading platform for hedge funds and others to process and deliver trades.

Marketcetera can start with algorithmic trades for hedge funds, but that's just the beginning. As Dana at ZDNet suggests, open source is increasingly "the traditional way" that software will get done. The fact that Marketcetera is open source will help it, and certainly won't pigeon-hole where it takes the technology or its business.

Congratulations to the Marketcetera team!

It is fascinating to see how people are using open source. I'm part of the "old guard" of open source, I suppose, delivering an open-source alternative to a tired market ripe for commoditization and innovation. But other companies, like OpenAds (open-source advertising server), Path Intelligence (tracking shopper flow based on the open-source GNU radio), Chumby (open-source consumer electronics/hardware), etc. are taking open source into new markets.

Today, I was fortunate to meet one of the most interesting open-source companies I've seen in a long, long time: Marketcetera. Marketcetera provides an open-source trading platform that hedge funds and others use to process and deliver trades through a brokerage to an exchange (like NASDAQ). It's like proprietary, expensive FlexTrade, only not proprietary...or expensive.

The market for this kind of platform is not huge today, as the founders, Toli Kuznets and Graham Miller, told me today (roughly $500 million for custom development, but probably not including packaged software like FlexTrade). But with more and more trading moving from people to algorithmic processes (30-40% in the US today, jumping to 50-60% by the end of the decade), the market will grow accordingly.

Besides, I can think of a range of other uses for this sort of technology beyond hedge funds.