Trade execution in a half a blink of an eye. When Equity algorithmic systems are seeing round trips of 500 ms to 50 ms, FX managers are looking for turnaround times of 300ms to 25ms.

All of these issues contribute to execution latency; the time to make a complete round trip; including broker’s internal latency, exchange configuration of hardware and software, order book processing time, and even proximity to exchange hosting services. The Latency time can be from 60ms to 850ms. Latency is not necessarily calculated by the fasted communication; like a tour du-France rider they must be able to be versatile; slowing downing, navigating corners, other obstructions and subjective dangers. It is more accurate to say a low touch and no touch trading will continue to consume and even larger percentage of the execution world.

The new National Market System Regulation (Reg. NMS) is finalized and dates are being set for implementation deadlines. It seems like it has been long road that we have traveled to get to where we are. But considering the mandate of Reg. NMS was first spelt out originally back in 1970, under §11a of the Securities Exchange Act of 1934, and the confused state of the pan-European efforts on unifying their own financial system, the US is doing  a relatively “good” job despite different opinions on how Reg. NMS should be implemented.

Since the original 1970 notion of a NMS, the market and its supporting technologies have naturally changed dramatically due partially in a “renaissance” in technology and the realization of a global economy. Due to this, the SEC has proposed updated high-level regulations to address these profound progressions, which include the following:

• A uniform trade-through rule for both exchange-and Nasdaq-listed securities;

• A uniform market access rule with de minimis fee standard;

• A sub-penny rule prohibiting market participants from displaying sub-penny quotes except for securities with a share price of below $1.00;

• A modified system for the dissemination and pricing of market data; and

• New Regulations NMS, which would consolidate the existing NMS, rules under §11A of the Exchange Act.

So the overall objectives are set and complaints form market participants of possible unfair changes continue to go on. Some are saying the new regulation does not go far enough to renovate the current system, while others say the regulation lacks any kind of global regulatory reassessment of the capital markets.

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Electronic trading strategies, strategies strategies… Everyone, including market service providers, like exchanges; broker-dealers; market utilities; and the buy side are hiring buckets of people to sit and scratch their heads and come up with an “electronic trading” strategy; which by the way they need to! Well it is going to be interesting, there has been so many products and services developed over the last few years; some innovative and useful, others not so much, that there is a quagmire of capabilities to sort through. I believe this situation was precipitated by several factors including; the T+1 mandate followed by the “promise” of STP, then followed by Basel II and continued with The Agency Disclosure Act, FAS 133 and now finally Reg. NMS. All these initiatives are certainly good and necessary, but they have clogged up a log-jam of electronic capabilities that we are now all piecing together. There are so many that:

There are small companies out there that have sophisticated algorithmic capabilities that support program trading, basket trading and crossing networks that no one has heard of.

I believe that underlying the regulatory mandates mentioned above there are common implementation characteristics. Some of the main one’s being transparency, better transaction times, and lower operational risk; which all lead to automation, and thus some sort of electronic implementation. This is why I believe there is such a back log of capabilities. Not to say that they would have not naturally have gone electronic anyway, but maybe not so dramatically and in such mass. What we are now seeing is the major players are sifting through all the surplus electronic capabilities and determining how they fit into their overall “electronic trading strategy”. Thus we are seeing a large and systemic consolidation in the electronic trading area. For instance, when CitiGroup bought Lava, you saw JPMorgan buy Neovest quickly and then BoNY bought Sonic so they were all covered on the program trading front. I believe this will continue.

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SWAPS are on the electronic move! (again…) With the recent purchase of Swapstream by the CME, the past release of PBWire by SwapWire, and the increasing use of ICAP’s I-Swap & FRA-Cross, we are seeing some encouraging movement in the electronic derivative space again. It seems that the ever increasing success of electronic trading in both the equity and fixed income markets are pressuring many participants to accelerate the implementation of interest rate swaps electronic capabilities. The SWAPS market has been ready for a renovation for a longtime. After all, trading, confirmation, and processing remain highly manual, while brokers continue to reap some of their largest fees from interest rate swaps. The market needs to get it right this time and delivery the following things:

• Increased market transparency. Multi-dealer platforms can function as anonymous liquidity aggregators, providing a deeper view of the market while tightening spreads.
• Significantly reduced transaction costs. Technology and reduced overhead allows these firms to offer significantly reduced brokerage fees. While none of the firms Celent spoke with would disclose exact fee schedules, all maintained that they offered deep discounts (as much as 50 percent) against prices charged by traditional voice brokers.
• Increased operational efficiency via straight-through processing (STP). Firms will see an overall reduction in operational overhead and error rates through increased STP integration.
• Decreased Operational Risk & Increased Relief on Reg. Capital: again, operational improvements that decrease error rates will allow firms to reduce Basel II-mandated capital reserve requirements, making swap trading significantly less capital-intensive.

Although swaps, like other OTC derivatives, can be highly customized financial instruments, many are the same and the industry felt that the swaps market was sufficiently standardized to be traded online. In response, several platforms have been implemented and promised to make the swap market markedly more efficient. To be fair the first attempt was not promising; The majority of these initiatives failed to attract significant interest from the market. The past 2 years have seen a “renaissance” in electronic swap trading initiatives, and things seem to be moving in the right direction.

CME’s acquisition of Swapstream expands the CME into global SWAPS trading. Swapstream is a neutral inter-dealer platform that supports the trading of SWAPS and is considered an ATS governed by the Financial Services Authority (FSA). Swapstream will help penetrate the fast growing $164 trillion in notion value OTC SWAPS market. Swapstream established market position of offering the greatest liquidity available and innovative functionality and CME’s global distribution, post-trade processing and clearing capabilities is a very synergetic match.

ICAP is the world’s largest electronic inter-dealers broker and is seeing great success with both their i-Swap and FRA-Cross products. i–Swap is an electronic booking model for provides a sophisticated view of liquidity, strategy trading, and STP for better execution. FRA-Cross provides a matching system so that traders can hedge their reset risk efficiently and cheaply.

SwapWires PBwire product allows firms to “give-up” their SWAP trades to other executing brokers. These so-called give-ups trades are cleared through other brokerages without the worry of the originating dealer. This service is becoming very popular with hedge funds as it becomes getting instantaneous execution to them which significantly reduction in the possibility of operational and trading risk.

If technology innovation and business collaboration continues we should see a markedly increase in SWAPS electronic trading which my pave the road for other derivatives.

Some firms are starting programs that offer hedge fund managers and certain other client’s portfolio margining for broad-based index options and corresponding Exchange Traded Funds (ETFs). This is a big move in hedge fund electronic technology and a bigger move for the business as it will free up capital for the funds.

Through freeing up capital for the hedge funds, non-US broker/dealer proprietary accounts and private clients, portfolio margining can bring additional liquidity to already booming equity options markets and will eventfully lead to a cross-product platform that truly leverages economic advantages across the asset classes.

A letter to the SEC applauding the New York Stock Exchange (NYSE) and Chicago Board Options Exchange (CBOE) proposals to permit cross margining of futures, securities and other instruments on a portfolio basis was sent.

As other markets permit the cross margining of their assets the more capital will be freed up within the industry. Equally important the electronic implementation of the cross margining of the portfolios will improve the over all risk management of the funds.

High frequency trading is not just about putting a lot of trades on in the fashion of a day trader. High frequency Trading is more about the analysis of real-time data that has a frequency that is much higher then we are traditionally used to. In fact it should be called Ultra high frequency. The follow statement I found on a blog just shows how little people do know about High frequency trading:

“HFT is not an inherently better way to trade the market. Indeed, given transaction costs, it is a relatively expensive way to trade. Furthermore, it emphasizes the importance of nano-second order transmission and smart order-execution routing.”                                –Finance Blog

High frequency can come in the form of pricing data that are consumed and acted upon by market participants. The original form of these prices is tick-by-tick data; each tick is one logical unit of information, like a quote or a transaction price. By nature these data points are irregularly spaced in time. Data vendors like Reuters transmit more than 275000 prices per day for a foreign exchange spot rate alone Ironically practitioners, most often, determine their trading decisions by observing high-frequency data but yet most studies published in financial literature deal with low-frequency, regularly spaced data. There are two main reasons for this. First, it is still rather costly and time consuming to collect, collate, store, retrieve, and manipulate high-frequency data. The second reason is somehow more subtle but still quite important: most statistical apparatus has been developed and thought for homogeneous time series. There is little work done to adopt the methods to data that arrives at irregular time intervals.

With the availability of these new data sets come new challenges associated with their analysis. Modern data sets may contain hundred of thousands of transactions or quotes in a single day for a single stock, time stamped to the nearest second. The analyses of these data are complicated by irregular spacing, diurnal patterns, price discreteness, and temporal dependence. These challenges are described below.