Understanding Observability for Capital Markets

Read how VuNet’s Business Journey Observability Platform helps you navigate the maze of market dynamics, regulatory complexity, and technological challenges in the trading and broking world.

Introduction

Financial markets, trading, and brokerage create a lively ecosystem where money and assets change hands. In this ecosystem, investors look for chances to grow their wealth. This includes individual traders, institutional investors, brokerage firms, and regulators. Together, they shape global finance. Financial markets cover diverse tools, including stocks, bonds, derivatives, currencies, and commodities, which help allocate capital and manage risk.

At the heart of financial markets lies trading, the process of buying and selling financial instruments to generate profits. Trading occurs across multiple platforms; from traditional stock exchanges to electronic trading networks (where transactions are executed at lightning speed). In this fast-paced environment, traders employ diverse strategies, ranging from fundamental analysis to algorithmic trading, leveraging technology and data to gain a competitive edge.

Facilitating these trading activities are brokerage firms. They serve as intermediaries between traders and the markets. They provide access to trading platforms, offer research and analysis tools, and execute trades on behalf of clients. With the rise of online brokerage platforms, retail investors have gained unprecedented access to financial markets, democratizing investment opportunities.

Given the pace at which transactions are executed; ensuring efficiency and reliability of trading systems is important. Observability, the ability to understand and monitor the internal workings of these systems, emerges as a crucial tool for market participants and regulatory authorities alike. By harnessing real-time data and advanced analytics, observability enables proactive risk management, enhances transparency, and fosters trust in financial markets. 

In this blog, we dive into the significance of observability, particularly business-centric observability, for financial markets, trading, and brokerage, exploring its role in safeguarding stability and integrity in an ever-evolving landscape.

Why Monitoring Financial Markets is a Complex Problem?

Observability for trading, broking firms, and capital markets, presents several challenges due to the nature of the financial industry, market dynamics, regulatory requirements, and technological complexity. Some of the key challenges involved include:

1. High Volume and Velocity of Data: Capital markets generate vast amounts of data from various sources such as market transactions, order books, market data feeds, news, and social media. For instance, High-Frequency Trading (HFT) is a type of algorithmic trading where high-volume orders are executed at extremely high speeds. The pace of data flows necessitates sophisticated monitoring and analysis capabilities to extract meaningful insights in real-time.

2. Fragmented Data Sources: Trading firms often interact with multiple exchanges, trading platforms, liquidity providers, and data vendors, each with its own data formats, protocols, and APIs. Integrating and correlating data from these fragmented sources poses challenges for observability, requiring robust data aggregation and normalization mechanisms.

3. Regulatory Compliance: Trading firms and brokers must follow strict regulations set by authorities like SEBI, RBI, and local regulatory bodies. Observability solutions help them comply with laws such as the Companies Act 2013, PMLA (Prevention of Money Laundering Act), FEMA (Foreign Exchange Management Act), Listing Obligations and Disclosure Requirements Regulations 2015, and Buyback of Securities Regulation 2018. These regulations require monitoring and reporting trading activities, preventing market abuse, and protecting shareholders and investors.

4. Technological Complexity: Trading firms depend on advanced technology like electronic trading platforms, algorithmic trading engines, market data and analytics systems, and blockchain technology. Managing and monitoring this technology stack to ensure it is always available, fast, and scalable presents major challenges for observability.

5. Real-time Monitoring and Alerting: Capital markets operate in real-time, where milliseconds can make a difference in trading outcomes. Observability solutions must provide real-time monitoring and alerting capabilities to detect anomalies, unusual activities, and system failures promptly. Even more desirable, design a system that predicts and pre-empts issues via remedial actions before they occur. 

6. Data Security and Privacy: Financial data is critical and must follow strict security and privacy regulations. Observability solutions must ensure robust security measures such as encryption, access controls, and data anonymization to protect sensitive information from unauthorized access or breaches.

7. Interdisciplinary Collaboration: Effective observability in trading and capital markets requires collaboration between stakeholders including traders, quants, risk managers, compliance officers, IT operations, and regulatory agencies. Observability solutions need to support cross-functional collaboration by providing customizable dashboards, reports, and workflows tailored to the needs of different stakeholders.

Addressing these complexities needs a new approach to observability. This approach brings together real-time monitoring, predictive analytics, and strong regulatory compliance with journey monitoring and domain expertise in capital markets. VuNet’s Business-Centric Observability platform, vuSmartMaps™, links business metrics with operational data. This ensures smooth, compliant, and efficient trading operations in the Indian financial markets

How Business-Centric Observability Can “Trade” Journey Data for Insights

Business-centric observability is vital for trading and broking firms as it monitors key business processes and transactions from start to finish.

The most crucial step in implementing business-centric observability in this domain is identifying the critical business processes within the financial markets, such as order execution, trade settlement, customer onboarding, and risk management. These processes represent the core activities that drive the functioning of the markets.

The next is to define and establish business KPIs (Key Performance Indicators) that reflect the health and performance of each business process. These KPIs could include metrics including trade execution time, transaction throughput, error rates, and customer satisfaction scores. Acceptable thresholds can be defined for each KPI to monitor performance against predefined benchmarks. 

Distributed tracing, logging, and metrics collection are enabled to capture real-time data and insights across the entire journey of each business process. Instrumentation points are strategically placed to gather relevant data at key touchpoints within the process flow, which gives rise to business lead indicators. By correlating these with IT metrics, it becomes possible to focus on a journey-centric view of issues affecting the user experience and narrow down Root Cause Analysis (RCA) to the precise micro-journeys or touchpoints/infrastructure elements slowing down or inducing transaction errors. 

In addition, here are the benefits that can be derived from Business-Centric Observability in capital markets: 

• Real-time Transaction Monitoring: Transaction flows can be monitored in real-time, e.g.: tracking trade executions, order book updates, and latency metrics. This helps identify anomalies, ensure compliance with regulations, make timely decisions, and optimize trading strategies.
• Performance Optimization: Observability enables trading firms to analyze the performance of their trading infrastructure, including execution speeds, order routing efficiency, and connectivity to exchanges. This helps optimize trading systems for speed, reliability, and cost-effectiveness.
• Customized Alerting: Business-centric observability allows firms to set up customized alerts based on specific market conditions or regulatory thresholds. This enables timely intervention and investigation into suspicious trading activities, ensuring market integrity and investor protection.
• Iterative Improvement: Insights gathered from business-centric observability can be leveraged to drive continuous improvement initiatives. Recurring issues, bottlenecks, and areas for optimization within business processes can be identified to implement targeted interventions and enhance efficiency, reliability, and customer satisfaction over time.

SEBI’s LAMA Framework

The Securities and Exchange Board of India (SEBI) regulates capital markets in India, aiming to protect investor interests and promote market development. To address technical glitches in stockbrokers’ digital trading systems, SEBI introduced an API-based Logging and Monitoring Mechanism (LAMA). This system monitors and reports malfunctions in hardware, software, networks, and processes. Stockbrokers must report glitches lasting over five minutes and perform root cause analysis within 14 days. LAMA ensures real-time insights, compliance, performance optimization, data transparency, and improved system uptime for stockbrokers. It applies to the top 35 retail brokers in India, with reporting every five minutes on critical systems and networks

VuNet’s Approach with LAMA

VuNet’s platform (vuLogX) uses advanced data modeling and enrichment to meet the SEBI LAMA framework requirements. Built on big data, it collects, correlates, visualizes, and notifies in real time, aligning with SEBI’s guidelines. This helps quickly detect and report issues and store data for detailed analysis. VuNet’s API-based interface integrates easily with other systems for efficient notifications and reporting, improving operational efficiency and regulatory compliance

Here is how the unique Features of VuNet’s Platform align with the requirements of the LAMA framework:

• Comprehensive Data Handling: The platform’s capabilities in data modeling, enrichment, and data pipeline enable domain-specific analysis of logs and events, aligning perfectly with the data-centric approach advocated by SEBI’s LAMA framework.
• Scalability: Engineered for handling high transaction volumes and concurrent activities, vuLogX guarantees scalability and instantaneous insights, ideal for the dynamic and fast-paced environment of the Indian financial markets.
• Enhanced Storyboarding and Alerts: We can correlate business metrics with operational metrics for swift anomaly detection and proactive business responses, through granular alerts and detailed storyboards. 
• Integrated Communication Channels: vuLogx can seamlessly integrate via API links with stock exchanges and communication channels including email, SMS, WhatsApp, and chatbots. This seamless integration facilitates efficient communication and enables prompt response to critical events and alerts.
• Cross-Functional Collaboration: The dashboards can be designed for various users, from business executives looking for operational insights to IT engineers needing detailed technical data. This capability to link business metrics with operational data ensures smooth, compliant, and efficient trading operations in line with the LAMA framework principles.

Conclusion

In summary, business-centric observability improves monitoring for trading firms and regulatory agencies in capital markets by offering real-time insights, supporting regulatory compliance, and enabling proactive risk management and performance optimization. Our platform equips financial institutions to adhere to the objectives defined within the LAMA framework in India ensures system uptime and compliance and provides advanced features that enhance observability, benefiting many stakeholders in the financial ecosystem.