Electronic Market Microstructure

HFT Requires “High-Performance Computing Systems” to Achive Low Latency

jbarseneau — Thu, 09 Jul 2009 17:37:46 +0000

Unlike the traditional definition of high-performance computing (HPC), which often states “that HPC is the use of supercomputers and computer clusters to solve advanced computation problems”, High-Performance Computing Systems (HPCS) is more encompassing. It is a super-set of HPC and has many high performance components that make up an end-to-end system that includes much more than just focusing on the compute engine, or processor; for instance it usually consists of (i) the computing capabilities, (ii) storage capabilities, (iii) external data acquisition, (iv) network communications, and (v) application performance. Also in traditional HPC, whether the compute engine is a supercomputer or distributed computers, the goal is to accelerate the calculation of the problem at hand. This is because tasks that require acceleration are so computationally intensive. This is not necessarily true in HPCS, the task at hand may be deterministic and simple in nature but the need for it to “happen” as quickly as possible is paramount. Not unlike the task of high-frequency trading.

In essence one can appreciate the difference by thinking that HPC’s objective is to maximize the through-put of a compute engine so that difficult problems can be solved as quickly as possible. Alternatively, the object of a HPCS is to maximize the through-put of a system so that transactions can be completed quickly as possible and therfore latency is low.

The objective of HPC and the minimization of latency through the processor certainly will improve the overall performance of increasing the throughput of transactions, or messages, in a system but it is not often the bottle neck. To approach frictionless throughput in a computer system one must analysis all potential sources of latency and address them so the individual improvement approaches compliment one another and produce an environmental, all encompassing improvement. I will try and create a taxonomy of candidate latency areas and what may be used to lower that latency. The taxonomy will be divided into the most logical components in terms of computing systems:

HPCS Architecture Taxonomy

Comutational components

Large Bus (64bit & 128bit)

Multiple Core

Large On-Chip Memory

Clusters

Grids

Special Processors (GPUs, Gate Arrays, & EPROMS)

Quantum Processor

Storage components

Solid State Discs

High Performance Databases

Cross-CPU Shared Memory

External data sources

Network communications, and

Utilizing Optimal Routing Protocols

Application components

Outlined above are the components I believe required to be addressed to develop a low-latency, High-Performance Computing System. I have also added subcategories under the components that represent some technologies or approaches that one might explore, and possibly, include in their low-latency architecture.

I will explore each component area in much more detail in further postings.

A Return to Commentary: What has advanced?

jbarseneau — Sun, 05 Jul 2009 23:03:12 +0000

Advances in computing have profoundly changed our society. It has provided us with the ability to capture and process massive volumes of meaningful data. We never before have had the amount of financial data available for analysis nor have had the processing power to analyze a complete market in real-time. This in conjunction with the advances in computational methods, we have been recently equipped to examine financial data in real-time and more efficiently than anytime previously.

This seris will examine the scientific and commercial relevance exposed as a result of the convergence of four advanced and diverse fields of; (i) model-driven trading, (ii) computational intelligence, (iii) the availability of high frequency market data, and (iv) the evolution of enabling technologies; such as available 64-bit processors, high performance data managers and grid computing. We will demonstrate the unique power of this technology convergence by analyzing quote depth, which is still not commercially available in historic form, in real-time and identifying important non-seasonal patterns. We will examine the BID-ASK depth of the NASDAQ cash equity market by loading and committing inhomogeneous time-series market data into cache memory. We will then applying the dataset to a continuously adaptive and biologically-inspired computational method that will conduct high speed pattern recognition. The resultant patterns will indicate market anomalies and will form stylized facts that in turn can be used to supply a paradigm for model-driven trading. Because of the technology barriers to entry and a high level of domain specific knowledge required the method described here has not been attempted by any known large non-bank entities and is truly ground breaking.

Automated Trading

jbarseneau — Mon, 24 Sep 2007 09:20:33 +0000

Improvment # 1: Discovery of opportunities in near real time.

No more missing a trading opportunity just because you aren’t staring at the right chart closely enough. Or wasting precious seconds entering an order manually while the market moves away from you. Using the superior processing speed of your computer, TradeStation is designed to monitor the markets, seek and identify trading opportunities based on the trading rules you’ve specified—and then send your buy, sell, and even your cancel orders—within fractions of second to all major ECNs and exchanges. And when seconds can mean the difference between a big gain and a disappointing trading loss, we believe you’ll find this a significant advantage.

Improvment # 2: High frequency data, track mpore or all markets in realtime

No longer do you have to be glued to your screen, trying to keep up with each stock at once. TradeStation gives you the power to monitor dozens or even hundreds of securities at once—and do it more efficiently—than ever before. It’s designed to follow multiple markets for you easily, no matter how complex your trading strategies are, or how precise your trading rules are. That means that you can include multiple conditional entries and exits, profit targets, protective stops, trailing stops, and more in your strategies, and have them all automated simultaneously.

Improvment # 3: Implement Behavioral Finance & Increase trading discipline
How often have you missed a trading opportunity simply because you hesitated too long…or watched your profits disappear because you held out for more profits, instead of sticking to your planned exit strategy? There’s simply no doubt that emotions can be your worst enemy when trading. TradeStation helps you combat your emotions by helping you get into the market—and out of it—all based on the historically tested strategies you design

faster than Fast; Why FX needs to be Sooo Fast

jbarseneau — Thu, 16 Aug 2007 06:13:28 +0000

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.

Latency; Survial of the fastest.

jbarseneau — Tue, 14 Aug 2007 11:19:33 +0000

The latency, speed and movement, of sensitive data has seen it’s obvious effects on the general quality of execution. There are many drivers that include satisfy the need for speed, consistency, and systemic capacity or throughput. Any slow down in this speed can be a losing proposition for the executor. Along with competitive pressure there are regulatory requirements that need to be address that include: MiFID, Reg NMS and Decimalization. The result of these market infrastructure changes is that of putting unprecedented pressure on the speed of execution.

In historical times the transportation of data can be seen to be executed as much as today, and as important. Without Nathan’s Rothschild’s elaborate network of hilltop lantern semaphores, he would not of known the out come of the battle of Waterloo a full day before the British government themselves thus profiteering in an unprecedented way; data and data latency has and always be a crucial component in the execution process. Along with continuing growth of MTFs, ECNs and crossing networks a large fragmentation of liquity is happening. Terms like light, and dark pools are being used to describe the difficulty in finding and access these pools of liquity. There are even special tools the “sweep” and aggregate liquity pools for execution before the pool moves.

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.

Reg. NMS is Electronic Trading; Now what is the Technology Impact?

jbarseneau — Mon, 13 Aug 2007 18:55:37 +0000

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.

Having said all of that, we are coming near the task at hand, becoming compliant. This will not be a simple task, it will include the following tasks; (i) business strategy, (ii) corporate alignment & sponsorship, (iii) funding & metrics of success, (iv) planning, (v) resource and provisioning, (vi) gap analysis, (vii) technology strategy: buy vs. build vs. renovate (viii) execution, (ix) testing & rollout, (x) implementation, and (xi) performance and compliance valuation. and roadmap the existing market structure and associated technologies and how they might be affected by the proposed new Reg. NMS changes. Admittedly these changes could be both good and bad for existing technologies; on one hand a required technology replacement or renovation may add value beyond the NMS requirement, or it can be considered a unnecessary regulatory gateway that degrades the overall performance and pureness of the particular functionality.

Reg. NMS and MiFID accelerate Market Surveillance to ultra-electronic Status

jbarseneau — Wed, 02 Aug 2006 10:45:25 +0000

The speed in which electronic trading now takes place is forcing market supervision and market surveillance to be become electronic, semi-automated, and real-time. This combined with the adoption of Reg. NMS in the US and MiFID in Europe has created even a greater need for market surveillance to be ultra-fast, predictive and adaptive. No longer will surveillance technology be “labeled” pedestrian or back office slop work. It will be akin to high tech MI5 or CIA overt type capabilities.

The primary objective of a modern surveillance department is to maintain a fair, and the most efficient market, for all participants. A fair market is one where all participants face a transparent set of trading rules which are effectively enforced. An efficient market is one where instantaneous exchange of securities for cash, or cash for securities, takes place at the lowest possible cost quickly. These objectives are sought after by all the different market participants including; broker-dealers, exchanges, ATSs, and clearing & settlement houses. Each participant, acting as layers of surveillance, provides compliance assurance so that the transaction moves to the next party with a high confidence that it complies with all regulations.

Most traditional surveillance systems are tailored for a non-electronic world. They are basically a large database of regulatory definitions that are used to instantiate exceptions when a suspicious trade is identified. This form allows the user to drill down into the data in order to inspect and identify exceptions that actually violate a rule. Starting from a broad view of the exchange, the system would then monitor the trading activity of each firm, individual trader, and the nature of each individual trade. This method forces many exceptions to the surface and requires experienced human intervention to decipher true breaches of the rule or just unusual trading behavior. It is, in other words a sophisticated real-time filter.

The New York Stock Exchange (NYSE) has launched a system called Ask Market Surveillance, a software-based legal research tool for helping floor members and their legal and compliance officers search and answer questions about NYSE trading rules.

“We are putting in one place all of the types of information that are really relevant to [floor members and floor member organizations] who have questions about trading on our floor,”

Nancy Reich, VP market surveillance at NYSE Regulation

The system above looks for exceptions so they can be mitigated creating the fair treatment of customers and the maintenance of orderly markets. This is more than a statutory mandate for an exchange – it’s an essential ingredient for their ultimate success. In our view, the key to an effective trade practice and market surveillance program is to:

identify the abusive practices which the exchange wishes to deter;
define the factors which could indicate the presence of the problem;
design programs to sift through trading data and generate certain core exception reports when the factors are found and which have the flexibility to tailor additional reports to particular circumstances; and
have experienced and capable staff in place to monitor trading activity, to review data from exception reports, to conduct any necessary inquiries, and to report any findings to the appropriate exchange committee.

Market Surveillance

Should any security exhibit unusual patterns of trading, it is automatically flagged for further analysis. Computers are also relied on to track securities and individual members’ activities over an extended period of time to detect potential abuses that may not be obvious from a single day’s trading. Notwithstanding the sophisticated hardware, people are at the heart of the detection process. In addition to our surveillance analysts, our listed companies and our floor members are sensitive to unusual trading patterns and they do not hesitate to bring them to the attention of our surveillance personnel. The investing public also will report perceived improprieties in their own accounts or in the market in general. We also work closely with the SEC and other self-regulatory bodies such as the Intermarket Surveillance Group, which is composed of the New York Stock Exchange, NASD, regional and options exchanges in the U.S., and foreign SROs such as the London Stock Exchange and Euronext, which alert us to abuses that may occur in more than one marketplace.

Sophisticated technology and pattern recognition systems are used by the staff to detect and investigate activity that may violate NYSE rules or federal securities laws. Such activity may involve:

Insider trading
Market manipulation
Breaches of fiduciary duties
Violation of agency responsibility and investor protection rules
Failure by specialists to maintain fair and orderly markets in listed securities and products, and
Violation of rules governing members’ on-Floor trading and auction market procedures.

Trading Surveillance

An integral part of the self-regulatory program of a market center is its surveillance of tarding activity. The trading floor is comprised of specialists, registered options traders, limited trading permit holders, member firm floor brokers, independent floor brokers, and their respective supporting staffs. The responsibility of ensuring that all trading activities effected by these floor members is in keeping with the rules of the SEC as well as the rules and policies of the exchange, falls within the purview of the Equities and Derivatives Trading Analysis departments. On-Floor trading and auction market procedures include creating exception reports to identify the following:

Trade-Through;
Locked Markets;
Crossed Markets;
Trading Ahead of customers;
Prearranged trading;
Wash trading;
Shredding Orders;
Money Passing;
Counterparty trade percentages;
Top order fishing;
Marking the close;
Error account;
Transfer trade activity and
Exchange transactions.

NFA also utilizes profiling of markets and individual traders to dynamically assess market participants trading patterns for unusual activity. In addition, the market surveillance process includes the monitoring of market activity in terms of price and volume and the monitoring of concentrations of ownership through large trader reports

Reg. NMS is Electronic Trading; Now what is the Technology Impact?

jbarseneau — Tue, 25 Jul 2006 02:27:45 +0000

The SEC’s Reg. NMS profoundly solidifies the paramount role of electronic trading in the US equities market and continues to encourage innovation, both business wise and technologically. In one simple sentence, Reg. NMS will Institutionalize Electronic Trading. But it does so by directly threatening the old way of conducting trade operations, including the jobs of specialists, floor brokers, and traditional traders.

In the post-Reg. NMS environment, algorithmic-based trading is expected to play an even greater role as traders attempt to capture Alpha in increasingly difficult market conditions for institutional-size trading. Algorithmic-based trading will be used for efficiency and productivity reasons, but an increasing number of firms will rely on algorithmic trading for regulatory compliance as well. This is truly the institutionalization of electronic trading and will push algorithmic-based trading into the main stream. The job now is up to the market participants to ensure all the necessary polices, procedures, and underlying technology infrastructure is in place to facilitate the implementation of Reg. NMS in 2007.

The adoption today of Reg NMS was the culmination of the Securities and Exchange Commission’s efforts over the past several years to re-examine and modernize the national market system.The SEC has worked diligently to resolve complex issues that are critical to investors. SIA has continuously supported an open dialogue on these important issues to ensure the enhancement of investor protection and increased competition among the markets”

— Statement by SIA EVP Don Kittell on April 6, 2005.

With the new deadline extensions, the proposed Reg. NMS is “finalized” and dates are being set for phased implementation deadlines. It seems like it has been a long road traveled, 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 challenging state of the pan-European efforts, addressed by MiFID, to unify 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 to a “renaissance” in technology and the realization of a global economy. To remedy this, the SEC has proposed updated high-level regulations to address these profound progressions. They include:

A uniform trade-through rulefor 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 concerns form market participants of possible unfair changes continue to go on; see Reg.NMS FAQ. Some participants suggest the new regulations do not go far enough to renovate the current system, while others say the regulations lacks any kind of global regulatory reassessment of the capital markets. Regardless of these concerns, the time to start a technology implementation has come.

The technology implementation will begin by examining the existing market structure and associated technologies to understand how they might be affected by the proposed Reg. NMS changes. Admittedly these changes could be both good or bad for existing systems; on one hand a required technology replacement or renovation may add value beyond the NMS requirement, e.g. improved surveillance, or it can be considered a unnecessary regulatory gateway that degrades the overall performance and pureness of the particular functionality. Either way, an in depth understanding is required before any strategic decisions are made.

Having said all of that, we are coming near the task at hand, becoming compliant. This will not be a simple task, it will include the following; (i) business strategy, (ii) corporate alignment & sponsorship, (iii) funding & metrics of success, (iv) planning, (v) resource and provisioning, (vi) gap analysis, (vii) technology strategy: buy vs. build vs. renovate (viii) execution, (ix) testing & roll-out, (x) implementation, and (xi) performance and compliance valuation. This process will start when a in depth understand of the new rules are had. the following subsections describe these new rules and the individual high-level technology requirements required for each.

1. Order Protection Rule

The order protection rule will be extend to displayed quotations that are immediately assessable automatic execution. The markets cover all the nine exchanges and the Nasdsq Stock Market. The protection also closes Inter-market Trading System Plan (ITS) gaps that allowed trade-throughs on block transactions of greater than 10,000 shares and on 100 share quotations in exchange listed shares.

Trade-Through Order
A trade-through order is an order that is executed at a price inferior to the best posted bid or ask. Basically, the market maker who received the order is unable or unwilling to fill it at the best posted bid or ask price. As a result, the trade is instead executed at the market maker’s price.

The order protection rule requires trading centers to establish, maintain and enforce polices and procedures that are “reasonably” design to prevent trade-through orders or to assume compliance with an exception.The objective of this rule is to create a level playing field for all market participants by providing equal access to prices and mandating that the trades be executed at the best price. If the best price is a displayed price, it cannot be “traded-through”, or in other words it cannot be ignored. Trading centers are considered to be exchanges, SROs, ATS (ECNs) exchanges, and OTC market makers, and any broker-dealer that internalizes, or crosses orders using their internal crossing network. For these entities to enable themselves to be come compliant the must address the following the following technology challenges:

Crossing Networks
A crossing networkis an electronic financial network for matching orders for execution without first routing the order to an exchange or market center (ATS, ECN, etc) where the order would be accessible for public viewing. The advantage of the crossing network is the ability to execute an order without impacting the public quote.

The trading centers will need to develop and implement written policies and procedures on how it will supervise and survey trade-through and exception compliance. They will then need to represent these new “rules” in their OMS and execution systems. This would include order routing, adding data elements to handle automated and manual quotes, exception management for inter-market sweeps and inaccessible quotations. The centers will also need to create private linkages to ensure that all protected quotes can be accessed. They will need FIX enhancements to accommodate the new functionality. Finally, they will need to develop or renovate their surveillance systems to monitor compliance by traders with trade through rules and ensure the integrity of the automated system. Broker-Dealers have just as much work to do. They need significant investment into their OMS systems, Order Routing, Market Data Repository, and Compliance system to support rule compliance. They will need to be able to execute inter-market sweep orders, which route orders to multiple marketplaces to execute them against liquidity at several price points. They need to have access, directly or indirectly, to all the protected sources. The Broker-Dealers block desk will need to be updated and use electronic trading services like algorithmic trading and crossing engines. They will also need FIX enhancements to accommodate the new functionality. And finally, Broker-Dealers will need to have a system that will measure the latency of the transactions for compliance monitoring.

2. Access Rule

Inter-market Trading System
Inter-market Trading System (ITS) is an electronic order routing system that facilitates inter-market trading of exchange-listed securities by allowing a broker-dealer in one market center to send an order to another market center trading the same security at a better price.

The Access Rule was necessary in order for the Order Protection rule’s possible implementation. This rule, however, also changes the way in which the commission views connectivity. This rule will create inter-market connectivity in which trading centers will establish connection through private lines or network carriers instead of the traditional ITS approach that centralizes market connectivity. Finally, the Access Rule requires SROs, to create the capability to prohibit their members from displaying quotations that lock or cross protect quotations of the market center. This is an attempt to create orderly and fair market, establishing the first market to produce the best price should receive the execution rather than being locked or crossed by another market center.

The broker-dealers already have resilient private connectivity; the few that don’t will most likely outsource it to a third party. Outsourcing such a critical part of one’s infrastructure would mean that the broker-dealer would require a full understanding of the operational risk of their supplier and insure they have more than adequate polices, procedures and technology in place so as to reduce the operational risk to an acceptable level for the broker-dealer.

3. Sub-Penny Rule

The sub-penny rule is the least contested rule, mainly due to the fact that there is already some precedence for complying to this rule; believed to be a byproduct of the Decimalization effort in 2000. The new rule would prohibit participants from displaying, ranking, or accepting quotes in NMS stocks that are priced in increments of less than a penny. This rule address the problem of “stepping ahead” of the displayed limit order by trivial amounts. This occurs often when participants are utilizing algorithmic-based execution capabilities that have the sub-penny calculations built into their models. The technology change to meet this rule seems pedestrian on the surface, but it can become intricate. The dealer-brokers will need to renovate their order entry systems to reject sub-penny orders so that they are compliant. This will most likely reduce the load on the system and simplifies capacity planning. Broker-dealers will also need to renovate their algorithmic-based execution capabilities so that they only calculate their methods using a most significant digit of.01.

4. Market Dissemination and Pricing Rule

Self-Regulatory Organization
An SRO is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and regulation. The ability of an SRO to exercise regulatory authority does not necessarily derive from a grant of authority from the government.

Self-Regulatory Organization

An SRO is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and regulation. The ability of an SRO to exercise regulatory authority does not necessarily derive from a grant of authority from the government.

The new market data rules are a refinement of existing commission accounting methods in which a partticant’s commission for providing quote data to an SRO, that then disseminates to investors (e.g. Reuters and Bloomberg), are calculated. The existing method is simply based on the number of quotes a participant provides. Market participants quickly found the holes in this rule and began to practice wash sales and shredding. The new rule will allocate commissions based on the value of the quotes in terms of best prices and the size of the largest quotes. This method will discourage participants from practicing wash sales or shredding.

A wash sales occurs when a participant enters into a transaction only to reverse it immediately. The transaction should gain net zero value, but the broker-dealer will collect commission on the two quotes that were provided to the market center. With tape shredding, a participant breaks up a large order, say 100k shares into 1k lots, and receives commissions for 100 quotes instead of only one.

The amened rule would also require that the markets utilize a single vendor for the management of the commissioning process. It currently is conducted by SIAC and the NASDAQ.

From a technology perspective, broker-dealers will need the ability to distribute proprietary information independently in addition to the processing by the SIP. They also must be able to control the amount of data that is distributed to their customers. The network processors, such as SIAC, will bear most of the technology burden to meet and comply to this rule. They will need to renovate their market data commission accounting system to conform to the new rules.

J. Brant Arseneau

Electronic Trading Strategies: An In-Organic March to Electronic Consolidation

jbarseneau — Thu, 20 Jul 2006 11:49:11 +0000

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.

The following are some recent consolodations that are of importance to the area of electronic trading.

NASDAQ acquired the Inet ECN: NASDAQ Aggregate its purchased liquidity, with approval from the SEC. It paid nearly a billion for Instinet last year. Then the exchange acquired the Brut ECN in 2004 from SunGard for nearly $200 million. Now it is time to reap even more rewards for this strategy. This might be a case when 1+1 does actually equal 3. System integration in NASDAQ-listed stocks will occur on a security-by-security phase-in currently scheduled for 28 August 2006. NYSE-, Amex- and regional-listed securities will be integrated on a single date, currently targeted for 1 October 2006.

No doubt this integration will create a single, much larger, book of liquidity, resulting in increased order interaction, execution speed and fill rates. The new system will provide improved execution quality and speed while maintaining the attributes of Market Center.

NYSE has acquired MatchPoint Trading: MatchPoint is a company specializing in call market trading and technology. It provides a proprietary electronic equity crossing system that matches aggregated orders at predetermined and distinct times, at prices that are derived from the primary market for securities. The technology can operate multiple matches each with a unique benchmark pricing model and can also process internal crosses for single participants and seamlessly enables residuals to participate in scheduled crossing sessions.

MatchPoint’s capabilities, I believe, will increase NYSE’s electronic execution facility in terms of speed and volume and may attract more program and basket trading bypassing specialist in the areas. It will be a very good compliment to the functionality of Archipelago if they are to integrate.

Thomson TradeWeb has acquired LeverTrade: A provider of Web-based fixed income management systems for the retail marketplace. LeverTrade was formed in August 2005 when IT consultancy LeverPoint acquired a major interest in Global Trade Technologies and formed the unit. The firm provides bond trading software to medium to large-sized bond trading firms in the US. Through LeverTrade’s retail fixed-income marketplace, financial advisors and retail representatives from firms search commingled inventory from over 30 broker-dealers and generate orders that flow to their internal trading desks.

This is a big move for Thomson; they basically bought a large part of the retail fixed-income trading business. Thomson and LeverTrade want to be the destination for clients looking for an end-to-end solution for all electronic fixed-income trading. With this acquisition they are well positioned.

Electronic Trading of SWAPS: Are we ready now?

jbarseneau — Tue, 18 Jul 2006 16:06:56 +0000

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.