European SME definition too small, exchanges complain

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May 8, 2025

Market participants are keen to bring more companies under the small and medium enterprise (SME) umbrella, stating that the current €200 million cap is outdated.

In its report to the European Commission, the European Securities and Markets Authority’s (ESMA) has issued a series of recommendations to support the goals of the Listing Act.

Introduced in November 2024, the listing act was designed with the intention of improving public capital market access to European companies and encouraging companies to IPO – and remain – on European markets.

Following a series of consultation papers on Level 2 measures for the act, ESMA has issued recommendations around MiFID II, the Market Abuse Regulation (MAR) and the Prospectus Regulation. The Commission has until July 2026 to adopt these recommendations.

SME GMs

ESMA reviewed the requirements for multilateral trading facilities (MTFs) and segments to register as small and medium enterprise growth markets (SME GMs). This category, introduced in Article 33 of MiFID II, aims to make it easier for SMEs to access capital markets and for specialist markets catering to these SMEs to develop further.

Further clarifying how an MTF can operate an SME GM, ESMA emphasised the need for high levels of investor protection and confidence, and minimal administrative burdens for issuers.

Some responses from industry bodies noted that the determining SME threshold of €200 million under MiFID II is too low, and should be raised to include mid-cap firms. Participants stated that this could increase market attractiveness and liquidity. ESMA has recommended that the European Commission take this into consideration.

In its response, Deutsche Borse commented: “The underlying definition of an SME within MiFID II (and other regulations) should be unified and increased regarding the market capitalisation. We support raising the threshold for companies qualifying from an average market capitalisation of €200 million to €500 million.”

Euronext proposed a greater increase, to €1 billion.

Article 78(2)(e) of CDR 2017/565 requires issuers to state whether their working capital is sufficient for present requirements. ESMA proposed that this requirement be aligned with the prospectus regulation and growth issuance prospects, specifying that working capital is applicable only for share issuances.

This was a more contentious issue for respondents, some of whom believe that this would increase administrative and monetary costs with limited benefits and could misrepresent an issuer’s overall financial health.

MAR

On MAR, requests were made by market participants for further clarification of what ‘inside information’ means, how the delay mechanism can be activated under the new structure, and the protocol for rumours or leaks occurring before the final event or circumstance. Participants also called for flexibility in the regime, with each case considered separately.

ESMA has recommended that protracted processes are more clearly defined as “a series of several actions or steps spread in time which need to be performed, in order to achieve a pre-defined objective or result”. The category is further down into three categories with this definition, identifying the relevant time for disclosure: (i) protracted processes that are entirely internal to the issuer, (ii) processes that involve the issuer and external counterparties and (iii) protracted processes that involve the issuer and public authorities.

ESMA has clarified that inside information related to intermediate steps in a protracted process is not subject to delayed disclosure requirements during disclosure.

Responding to the proposals, Nasdaq Nordics called for simplified and clarified guidance across member states when it comes to disclosing inside information in a protracted process.

“Although the establishment of the “decision to sign off the agreement” as the moment when disclosure is expected is a positive step in forming a common understanding of MAR, Nasdaq Nordic suggests ESMA to consider the signing of an agreement as the key moment instead. The “decision to sign off” could be subject to different interpretations in different member states,” it stated.

“[This is] a much more concrete event in a protracted process, where a legally binding agreement comes into existence for all parties, and thus not as open to different interpretations.”

By contrast, Deutsche Borse suggested that stakeholders inform the market earlier – when the authority decides to begin proceedings. Opting for the time of decision to sign off on the agreement as the point of disclosure is too late, it argued.

“It does not make much sense to define the receipt by the issuer of the final decision of the authority as the final event if that final event will never be the relevant point in time of disclosure in practice. Also, for some allegations even the initiation of proceedings would represent a price-sensitive event.”

“DBG thinks that ESMA’s assumption that the management board decision already provides for a sufficient degree of certainty regarding the outcome of the process disregards the crucial role of the supervisory board as an independent body in two-tier systems. If the supervisory board approval is mandatory under statutory law, such approval requirement should be considered. We would therefore ask ESMA to please reconsider its current position.”

The group also stated that clarification is needed to determine whether elements of protracted processes depend, at least partly, on the issuer or not. Currently, it said, the scenarios this model applies to is uncertain.

Jefferies: The next step in outsourced trading

By

GlobalTrading

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May 8, 2025

Outsourced trading continues to grow, with an increasing number of firms opting for the strategy to build out their operations.

Dean Gray, head of international outsourced trading, and Joram Siegel, head of fixed income outsourced trading at Jefferies discuss the evolving space, what makes their offering stand out, and what comes next.

What does the current landscape look like and where does Jefferies sit amongst the outsourced trading offerings?

Dean Gray, Jefferies — Dean Gray, Head of EMEA Outsourced Trading, Jefferies International.

Dean Gray: The outsourced trading landscape has evolved into a number of differentiated offerings, all customisable to the needs of the underlying client.

Larger players who can invest more and scale their businesses are dominating the space, enhancing the overall quality of the Outsourced Trading offering for our clients. Bigger providers are also able to attract tier-one talent to their teams which, subsequently, firms of all sizes have access to. For more sophisticated clients, affiliation to recognised brand names, like Jefferies, makes them more comfortable with outsourcing.

The desk is ring fenced within our prime services group of offerings, and that affiliation allows us to provide a number of ancillary services that increase our partnership with clients and aid their growth. These include financing, synthetics, capital introduction, trade reporting, portfolio accounting and commission management. That said, you do not need to use Jefferies as a prime broker to be a client of the outsourced trading desk – many are not.

While other participants have merged or excited the Outsourced Trading business, Jefferies has continued to invest, cementing its position as a market leader in the industry.

We have operational resilience. We’ve got robust service, technology and business continuity. Also, being part of a firm the size of Jefferies allows our outsourced trading offering to go well beyond just providing a better execution for our clients. We can give them a trading infrastructure above what others can offer.

What have been the catalysts for growth and how has outsourced trading been adopted globally? Why have we seen this growth?

DG: Outsourced trading has become increasingly utilised over the last decade. The growth of technology, and the growth of technology spend, has allowed the major players to expand their share of the market. I think Covid also helped drive some of the evolution, taking outsourced trading forward to its next chapter.

Different geographies are at varying stages in their adoption of outsourced trading. Many potential clients have already made the decision to outsource for a number of reasons, from reducing costs and improving market access, to cover in a specific region and asset class support, so it’s not always necessarily about trying to sell the concept of outsourced trading, instead you’re selling your specific offering.

Recent volatility and increased market volumes have proved challenging for many firms, which is where scalable outsourced trading solutions can really be of benefit. At Jefferies, our outsourced trading desk consists of dedicated traders, all of whom have a huge amount of experience from working on the buy side that can help clients navigate difficult markets. We understand exactly what clients’ needs are and where they’re coming from since we’ve sat in their seats for many years. Additionally, each client is allocated service representatives to support them operationally from onboarding through to trade settlement.

The industry continues to evolve. Lately, we have seen outsourced trading providers working alongside other institutional managers and bringing their desks in-house. The Jefferies model is perfectly suited to this, allowing firms to keep their access to the street whilst enjoying the benefits the Jefferies offering provides.

How is the Jefferies outsourced trading business structured?

DG: We have offices in the US, London and Hong Kong, so we can trade global markets. All of our clients get a point of contact in each region. There is a seamless transition of order flow.

As previously mentioned, our outsourced trading business is completely segregated from the rest of the Jefferies equity businesses. Any trades, any information that comes in is only ever known within the outsourced trading operation at Jefferies. That’s important to our clients. They also get the comfort that they’re affiliating themselves to a global, regulated brand. We are able to align ourselves closely with them, and that trust has really helped to drive the business.

We pride ourselves on the strength of our capabilities. The offering is well established, so clients and traders are supported by dedicated sales, specialist operations teams, and ongoing assistance throughout the whole process. Access to a robust trading infrastructure also improves the overall client experience.

What, if any, additional services do you offer clients aside from execution?

DG: There are a lot of perks that come with being part of a bigger organisation. Everything you would expect from a traditional buy side trader is something that we offer our clients here at Jefferies, as well as access to capital markets, research, corporate access, and prime brokerage services. We can also leverage Jefferies’ legal and compliance teams.

We sit within the wider information barriers of prime brokerage, which gives us access to some of their services too. What we say to clients is, when you come to Jefferies, you’re not just getting a flow trader, you’re not just getting an extension of your broker list, you’re getting two things in one. You’re getting the closest thing that I think you’ll find to a centralised buy side trading model, as well as the ability to leverage additional services, aligned to our clients’ investment processes.

What’s next for Jefferies’s outsourced trading business?

DG: Jefferies is able to significantly invest in both human capital and technology so we can stay at the forefront of the industry and provide a best-in-class offering. We’re projecting growth as we expand asset classes in each of our geographies. Jefferies are fully entrenched in outsourced trading, yet continue investing, ensuring we maintain our position as market leaders.

Joram Siegel: We’re planning to go live with our expansion into the fixed income space later this year. As the industry has evolved, much larger asset managers have started contemplating outsourcing for some or all of their trading. They tend to be multi-asset, so being able to offer a full suite of services has become increasingly important.

The idea has always been to take the outsourced trading framework in equities, and all the benefits that come with that, and customise it for the fixed income space. There are nuances between the asset classes, and having traders with the knowledge and relationships with the market who understand that is an important selling point.

Liontrust loses McLoughlin

By

Lucy Carter

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May 7, 2025

Matthew McLoughlin, ex-Liontrust Asset Management

Head of trading Matthew McLoughlin has resigned from Liontrust Asset Management.

McLoughlin has been a partner and head of trading at the active asset management firm since 2016, taking on the role of chief commercial officer in 2023. Prior to this, he spent a year as a senior trader at the firm.

Announcing his departure via LinkedIn, McLoughlin said: “It’s been a privilege to help scale one of the UK’s most ambitious investment managers. I’m now energised for the next chapter.”

In the first half of 2024, Liontrust reported a 28% decline in profits. In the six months to 30 September 2024, the firm’s most recently reported results, gross profits were £98.6 million. Assets under management were £26 billion.

With more than two decades of industry experience, McLoughlin began his career in debt and reserves management at HM Treasury. Throughout his career, he has been a global equity and derivatives trader at LGIM, a senior cross-asset trader at RAB Capital, and a credit portfolio manager at AIG.

He has been a director at Plato Partnership since 2017.

Private rooms circumventing regulation, Citadel Securities claims

By

Lucy Carter

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May 7, 2025

Citadel Securities has called for a crackdown on private rooms in its list of policy recommendations for the SEC.

The policy paper states that the growing use of alternative trading systems (ATS) in US equity markets requires a reconsideration of regulatory frameworks, arguing that protocols currently allow for a circumvention of best execution requirements. Citadel Securities particularly benefits from one such regulation, Regulation NMS, which requires brokers to direct orders to market makers.

A common complaint of ATSs is that they are overly opaque and insufficiently monitored. Citadel agrees, stating that trading protocols and arrangements with liquidity providers around private rooms are only minimally disclosed. Currently absent from reports are explanations of the processes behind private room establishment, the rationale for new order types exclusive to private rooms and how the rooms are governed, the company stated.

ATSs are governed by the SEC’s Rule 605, requiring them to disclose certain order execution information. However, Citadel Securities states that venues are dodging this requirement by labelling all orders as ‘not held’ and exempting them from the rule, leading to poor or absent execution quality reports. Under Rule 606, which covers order routing reports, the firm states that ATSs should be producing consistent, granular reports that explain where orders are routed within the ATS, such as to a private room.

Speaking to Global Trading earlier this year, market participants countered that private rooms make up a small subsection of overall ATS volumes, and that controversy around their opacity is disproportionate. Mett Kinak, global head of equity trading at T Rowe Price, observed: “Transparency around their size, their meaningfulness, is valuable. If people can see that an ATS has 2% of total market share, and that 2% of that share is in hosted rooms, they’d realise that there’s no big story.”

ATSs currently represent 10% of total market volume in US equities.

Under existing regulations, ATSs are permitted to select who can use their platforms with impunity, so long as a 5% average daily trading volume threshold is not crossed on the security being traded. Citadel argues that these are “discriminatory practices”, particularly when private rooms are involved, a subsection of ATSs which allows firms to trade with an exclusive group of counterparties.

“ATSs should only be allowed to determine execution priority based on the characteristics of an order, and not the identity of the sender,” it states. Further, there is no obligation of best execution for ATSs or executing counterparties for retail orders executed in private rooms – meaning that retail orders can be pushed to the bottom of the list.

Citadel Securities argues that private rooms do not comply with Regulation ATS, introduced by the SEC in 1998. The firm states that these rooms “closely resemble the single-dealer systems that the Commission specifically excluded from the definition of an ‘exchange’. The notion of establishing a fully-siloed single-dealer system under the umbrella of an ATS does not appear to be contemplated by the regulation.”

Despite Citadel Securities’s insistence of “the problematic growth of private rooms on ATSs”, others in the market argue that the company is running a similar operation themselves.

“They wouldn’t call themselves hosted rooms because they have their own venues, but [single-dealer platforms like Virtu and Citadel] are essentially doing the same thing, just operating the venue itself,” Kinak affirmed.

The need for speed

By

Etienne Mercuriali

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May 6, 2025

Powered by new computer chips, high-frequency trading (HFT) has reached nanosecond timescales. Fierce competition has prompted a new wave of speculative orders, prompting allegations of market abuse.

HFT used to be measured in milliseconds, with traders using microwave towers to exploit latency in exchange feeds. Those days seem quaint today.

Using a platform provided by BMLL, we analysed 6 years of data starting in February 2019. Our own analysis of 2.3 billion DAX futures orders on Eurex reveals a striking trend: the share of trades modified within one millisecond has risen from 11% in 2019 to over 17% in 2024 [see box]. At Euronext, analysis of a single stock – BNP Paribas – shows an almost threefold increase in sub-100 microsecond order modifications during the same time period.

The hardware arms race and speculative triggering

The earlier generation of HFT relied on technology such as microwave networks to reduce latency between multiple trading locations. But in a competitive environment, even microseconds proved too slow. Specialised computer chips called Field-Programmable Gate Arrays (FPGAs) have now become the industry standard for cutting latency from microseconds to tens of nanoseconds.

As more firms entered the race, vendors stepped in offering custom integrated circuits and optimised networks. David Taylor, CEO of specialist HFT vendor Exegy explains: “Firms pushing into the 10-nanosecond realm are not just relying on FPGAs – they’re designing custom integrated circuits with breakthroughs in optical-to-electronic conversion and low-level networking to capture every precious nanosecond.”

This arms race has led to some creative tactics. Until 2018, Vincent Akkermans was a senior developer at Optiver and is now co-founder at TenFive AI, a company that develops advanced multi-agent AI applications. Before he left Optiver, Akkermans worked with the pioneers of “speculative execution” or “speculative triggering” in HFT, whereby FPGA chips allow orders to be initiated, and then, based on sub-microsecond signals, cancelled by leaving them incomplete before they have been processed by the exchange.

“Using FPGAs to begin processing and transmitting orders before the complete market message is received represents a paradigm shift in trading speed – pushing the limits of how fast orders can be executed,” Akkermans says.

“It’s crazy how much brain power is devoted to shaving off nanoseconds – showing that in a competitive market, even the tiniest advantage is pursued relentlessly.”

European exchanges have incorporated features to allow speculative execution by HFTs – within certain limits. “Speculative triggering refers to certain latency arbitrage strategies when market participants start to send an order before they have fully processed the incoming market data,” explains Jonas Ullmann, Frankfurt-based Eurex board member and COO.

High Frequency Trading charts

To exploit the strategy, HFTs have to occupy a grey area between raw messages and fully-fledged orders to the exchange, where nanoseconds count. “We’ve built in features such as the “discard IP” and “DSCP” field to prevent detrimental effects on market integrity and provide a clear technical framework. Messages sent to the “discard IP” will not reach the trading system gateway and matching engine, so this can be seen as a trash bin,” Ullmann tells Global Trading.

“These packets will be discarded at the Access Layer switch port and no other participant is influenced,” he added. “Packets sent to the discard IP address are not considered to be orders and are not forwarded to the exchange. Due to the nature of where the IP address is specified in the message, you need to decide very early whether to send it to the exchange or discard IP.”

Speculative execution has recently attracted controversy. In March, a Paris-based market maker, Mosaic Finance, accused Eurex of allowing the practice to explode on its venue. Mosaic claimed that Eurex was being flooded by millions of corrupted orders per second, in violation of its rules. HFTs were doing this in order to push their way to the front of the order queue, Mosaic complained.

Jonas Ullmann

Eurex strongly disputes the accusations. “There are strict limits in place,” insists Ullmann, highlighting the difference between raw messages and actual orders. “For instance, participants are allowed to send up to 30,000 ethernet frames per second and no more than 600,000 ethernet frames per minute across the network.” Mosaic’s allegation that it was able to breach these limits by sneaking corrupted data past Eurex’s own monitoring system is “incorrect,” Ullmann says. “The allegations from this individual trading participant are unfounded and all substantive concerns raised have been repeatedly reviewed by Eurex. None of the issues raised proved to have merit.”

Akkermans is inclined to accept Eurex’s side of this argument. “It would surprise me that if lots of invalid network traffic were sent that the exchange wouldn’t notice, although I cannot say with any certainty – I’m not a network engineer. Additionally, the discussions I heard about the speculative execution were always grounded in the desire to only send valid messages. They were well aware that it would be possible to make the message invalid at the final moment, but also that this would contravene the rules and shouldn’t be done. I do believe the culture was such that this was a genuine intent,” he says.

A spokesperson from Optiver declined to comment on whether the firm still conducted speculative execution, and whether it deployed the strategy at Eurex.

The value of technology

Even so, the controversy highlights the competitiveness of the new environment.
Milan Dvorak, CEO of Magmio, an FPGA software provider, agrees that even a moderate jump in speed can bring rewards.

“By moving decision logic from software onto the network via FPGA technology, traders can reduce latency from microseconds to tens of nanoseconds, giving them a competitive edge even if they’re not the fastest in absolute terms,” Dvorak says. “There’s a market for every latency bracket. Even if you’re not the absolute fastest, having a robust strategy means you can still profit from the opportunities available at your speed level.”

Milan Dvorak

At the same time, these technologies require deep expertise. Programming an FPGA takes specialised skills, especially if you want to tweak the hardware’s logic.

According to Milan Kratka, CTO of broker Trading Block who started at Citadel in the early 1990s, “I was one of Citadel’s first quant – and that early experience taught me that in trading, speed isn’t just about quoting; it’s about being the first to respond to a market event.”

He tells Global Trading that while many traders know they must quote quickly, the real edge appears when markets suddenly shift. If you can pull or modify your quote a split-second faster, you either avoid a bad fill or seize a profitable one. Or, as he puts it: “Programming an FPGA is a rigorous process – but once optimised, it delivers decision speeds measured in nanoseconds, offering a decisive edge in today’s fast-paced markets.”

However, HFT vendor McKay Brothers warns about a level of hype over the technology. “We use FPGAs where deterministic behaviour and extremely low jitter are critical,” according to CEO Stephane Tyc. “But they’re not always necessary. An FPGA might buy you nanoseconds; good transport can buy you milliseconds. Both matter, depending on the use case.”

McKay says its approach has broadened beyond latency-obsessed clients. “Many of our recent products are built purely in software,” Tyc adds, noting that “flexibility now rivals raw speed. This isn’t a religious debate for us, it’s a question of fit-for-purpose design.”

Stephane Tyc

Hardware and Integration

There is also competition to provide specialised FPGA hardware. Chipmaker AMD has emerged as a leading provider of FPGA-based hardware, offering chips that support everything from sub-10 nanosecond trades to high-volume analytics.

AMD sales director Alastair Richardson envisions chiplet architectures enabling more modular designs: “By using a chiplet process – breaking a processor into smaller pieces – instead of the traditional large piece of silicon, monolithic method, we can build complex processors, with more capabilities and more efficiency. This includes things like 3D stacking of chips or pushing the boundaries of core counts in a single processor.”

In practice, large trading shops might combine an FPGA for the ultra-fast “tick-to-trade” loop with additional GPUs or CPUs for broader risk modelling and artificial intelligence-based prediction. The net effect is a hybrid computing approach that merges microsecond-level decision-making with bigger-picture analytics – something unattainable until recently.

Fragmented Markets and Regulatory Nuances

In the US, the Regulation National Market System (Reg NMS) has forced firms to route to the best price across multiple venues, making speed crucial for updating quotes instantly and picking off mispriced orders. Europe mirrors this fragmentation under the Market in Financial Instrument Directives (MiFID I, and II), albeit with more complexity around data fees and pan-European connectivity. Firms must link to multiple exchanges to remain competitive, each link adding cost.

According to Exegy’s Taylor: “Market fragmentation in Europe is a significant challenge, connecting to all relevant markets can be two to three times more expensive than in the US.”

Despite these hurdles, a European consolidated tape is on the horizon, potentially lowering entry barriers.

Taylor says: “The current phase of the European Consolidated Tape is just a consolidated trade report – it isn’t directly tradable yet. However, many in the industry are bullish that it will eventually evolve into a tradable tape. This would lower the cost of achieving pan-market visibility and drive more innovation.”

Fast but secure: Protecting trading DNA

Given the stakes at play, safeguarding proprietary strategies, and intellectual property is crucial for trading firms. Vendors like Exegy and Magmio emphasise frameworks that let clients deploy code without exposing it to the vendor.

David Taylor

Exegy’s Taylor says: “We empower our clients to innovate without compromising their secrets – whether through a configurable software interface or a sandboxed FPGA where their proprietary code remains completely private.”

Milan Dvorak of Magmio echoes this: “We deliver our solution as a framework without ever seeing the actual strategy. Our clients maintain full control over their code, ensuring their competitive edge remains completely confidential,”

According to former Optiver developer Vincent Akkermanns, high frequency trading firms embed structural risk considerations in their systems and their operations. Developing teams are close to traders:

“The usual routine was to get in early, listen in on the traders’ briefing, and then get to work on the market links and trading software for which I was responsible. I liaised with traders, assistants, and mid-office and compliance to get requirements. Our team sat on the trading floor, so it was easy pretty noisy, but also easy to get a sense of what was going on.”

For him, “The entire system is engineered so that every role – from the trading floor to the back office – contributes to a high level of technological sophistication, ensuring the market functions more efficiently.”

Tyc agrees: “That’s been a quiet success story over the past decade. The firms operating in these environments today have developed robust internal controls, risk frameworks, and strong engineering ethics. McKay itself is not a trading firm, but we work closely with some of the most sophisticated market participants in the world, and we see firsthand the care they take to build systems that are both high-performing and well-governed.

One of the key concepts that has emerged as a result of low latency investment is determinism. Deterministic systems – those that behave in highly predictable ways – can support more precise risk management, but like anything, too much of a good thing has trade-offs. We’ve seen exchanges that pushed determinism to extremes and inadvertently created unintended market structure effects. A small amount of jitter can help level the playing field; too much, and you get chaotic, inefficient markets. Some venues that could be extremely deterministic have chosen to introduce intentional randomness to prevent predictability from becoming an exploit.

It’s a balancing act – much like the question of private fills printing before public trades. There’s no universal answer. What matters most is transparency: clearly disclosing how systems behave and how access is granted. If disclosure is fair and access is equitable, the market can and will adapt. We don’t need to prescribe a singular model, if the rules are visible and access is open, competitive pressure will do the rest.”

When a single glitch can devastate even established firms, like was the case at Knight Capital. HFT are rightfully obsessed not just with speed but also reliability – a balancing act that shapes internal processes and controls.

Lawsuits and regulatory filings reveal how fiercely competitive the sector is. Consider the lawsuit by Skywave Networks against leading HFT players Virtu and Jump Trading that alleged fraud in the use of experimental shortwave licences (the defendants dispute the allegations). Or the complaint by McKay Brothers against Nasdaq, which forced the exchange to stop offering preferential low latency access to high-paying clients. All market participants are racing to compete.

Can the market keep up?

Proponents argue that high-speed competition narrows spreads, boosting liquidity and benefiting all investors. Critics label it an expensive arms race, with diminishing returns and potential negative externalities when markets become “too fast.” Regulators in the US and Europe have taken incremental steps – such as imposing licensing for HFTs, demanding kill switches, or endorsing “speed bumps” in certain venues – but nothing has fully reversed the move to ever faster speed.

The future may see more frequent usage of AI. Although neural networks can be too heavy for the tightest loop, they can assist in slightly upstream decision-making or in scanning large data sets for predictive signals. Meanwhile, talk of quantum computing hovers at the edge of possibility, but immediate breakthroughs remain speculative.

Alastair Richardson

AMD’s Richardson hints that more integrated hardware solutions – combining FPGAs, GPUs, specialised network adapters, and even novel high-performance computing (HPC) techniques – will likely define the next wave.

“We’re now witnessing a new latency race that involves AI, with some tasks still best served by a dedicated FPGA or ASIC, while others lean on CPU’s, GPUs or NPU’s to do more complex AI inference.”

If anything can slow the chase, it might be the laws of physics. Market data cannot traverse distances faster than the speed of light, leaving only network design and extremely clever hardware optimisations to squeeze out incremental gains. Still, as the last decade has shown, major leaps – from microwave relays to shortwave transatlantic signals – can arise when profit potential is high enough.

Exegy’s Taylor points to the stratification forming in this space: “While the top-tier HFT players operating at nine nanoseconds are few and stable, the dynamic next layer – trading at deep sub-millisecond speeds across multiple assets – is where fierce competition and innovation are truly unfolding.”

Most technology vendors are pushing in this direction, Tyc tells us that McKay has been working with exchanges like Euronext to allow firms to reroute connectivity with no hardware changes, “a seismic shift,” as Tyc puts it, in how infrastructure is accessed.
He adds, “That plug-and-play simplicity destroys the barrier to entry,” Tyc says.

Even if the absolute fastest tier remains exclusive, broad adoption of low latency technologies – from microwaves to FPGAs – has high-speed tactics permeating all corners of trading. And that reality, though it continues to spark debate, is almost certain to persist. As innovations, from AI integration to chiplet architectures, make once-exotic technology more widely accessible, the race to zero won’t be stopping anytime soon. Speed, in all its minute increments, has become part of the market’s DNA.

Behind closed doors: Slander and secrets

By

Lucy Carter

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May 6, 2025

The use of alternative trading systems (ATSs) has increased drastically over recent years, now accounting for more than half of US equity trading volume. Lately, these platforms have begun to offer a new service, allowing brokers to create closed trading pools for their buy-side clients. These private rooms – also called hosted rooms – allow brokers to internalise their flows without having to create their own dark pools and go through the burdensome technical and regulatory workload this would provoke.

These venues also minimise the market impact of larger trades, with prices remaining steadier than they would on a lit venue.

It all sounds appealing – until you hear whispers that these rooms are not as private as they seem, and that market makers are being let in on the sly to snap up order flow.

Reports of this nature have been swirling for a number of years now, popping up at conference panels and in quiet conversations – although there is hesitancy among individuals to be too vocal about their concerns. For some, this has given private rooms a sordid edge, the platforms looked down on as illegitimate intruders.

Global Trading spoke to buy-side participants to get to the root of the rumours.

Pool party

Mehmet Kinak, global head of equity trading at T Rowe Price, explained how private rooms are filling a gap in the market. “If you run an ATS, I can interact with your liquidity in that dark pool. If you run a single dealer platform, I can interact with you there. But if you are a smaller market maker that has neither of those options, we have nowhere to meet up bilaterally. The easiest solution for us to be able to interact bilaterally is to find each other in a hosted pool,” he said.

Market makers are attracted to private rooms because of their perennial fear of adverse selection in public venues by participants possessing market-moving information. “When trading on exchange, flow is an aggregate of many different market participants with both benign (non-directional) flow and directional flow,” according to Jeremy Smart, Head of Distribution at XTX Markets. “As a result, market makers will provide liquidity that reflects the average of the flow profile. Because of this, the benign flow does not attract the liquidity that it could achieve.

Mehmet Kinak

“If a client has really good flow, it makes sense to go to a hosted room to get some of the best, highest quality liquidity,” Smart adds. “They allow for interactions on a more bespoke basis, without the need to connect to 10 different liquidity providers and for 10 different FIX connections.

“It’s more direct, more disclosed, and can facilitate really strong direct relationships.”

“Because you know who the other parties are, you can show even larger sizes and or even better pricing,” explained Vlad Khandros, CEO of OneChronos Capital Markets, referencing the company’s Nexus platform. “That can increase the liquidity in the pool and provide better pricing. If people know who they’re trading with, they can further lean in.”

There’s a reduced risk of information leakage when private rooms are used, an appealing prospect for buy-side traders desperate to avoid competitors frontrunning them. A limited number of counterparties cuts down the chance of information revealed, deliberately or inadvertently, being used against room participants, allowing them to be bolder in their actions.

“Clients have the ability to completely control how the room works, the prioritisation of who gets the orders first before random allocation – however they want the logic to work, they can set it up,” Smart added.

Jeremy Smart

“Whether you’re a retail broker or a long-only buy-side trader or a systematic hedge fund, it doesn’t matter. Whatever type of client you are, you’re in complete control of who is in the pool, the attributes of the pool and ultimately therefore the liquidity you can access.”

The private room concept is not exclusive to ATSs, according to Kinak. “Single-dealer platforms like Virtu and Citadel are running similar services,” he said. “They wouldn’t call themselves hosted rooms because they have their own venues, but they are essentially doing the same thing, just operating the venue itself.”

Those names have cast a shadow over the space, with rumours that the market makers are being let into hosted rooms and nabbing flow without the knowledge of other participants.

Uninvited guests

Providers, of course, are keen to dispute the claims, defending the security of their systems and the resilience of their compliance.

“You can’t just invite someone randomly into one of our rooms without the sponsor of that room knowing,” Khandros said. “Each side opts in and can know who’s on the other side of the fill. There’s complete control and transparency. We’ve built it with the customer in mind. Giving our customers the option of that full control, we think, is a good thing.”

Vlad Khandros

Among other market participants, those with less skin in the game, the sentiment is similar. Smart is direct: “The rumours are complete fantasy. There’s no lack of transparency there – the client is in full control.”

“These ideas are being pushed by those who want interactions to happen on their terms,” he argued, noting a historical trend of suspicion towards any changes in market structure.

“We’ve heard some negativity from people who wanted to launch a platform and didn’t, or who aren’t being invited to these rooms,” a source familiar with the issue corroborated.

“Conspiracy theories are always running rampant in our industry,” Kinak agreed. “Traders are generally sceptical around how things work. They’re paranoid.”

However, he acknowledges that there is a kernel of truth in some of these concerns.

“It’s true that private rooms are not as transparent as the lit market. Segmentation, by definition, is going to limit people’s participation. But that’s one of the main reasons we use ATSs,” Kinak said.

“I try to dispel the negative connotations around private rooms,” he added. “Lots of people think mysterious things are going on in them, but they’re just a solution to help with segmentation.”

Worries about who else is in a private room are not without precedent.

“When the national market system (NMS) regulation was introduced in the US, there were a couple of scandals about players allowing people into their dark pools without disclosure,” one market participant recalled. “Sometimes it was market makers, sometimes principal flow from their own shops. They were fined and suffered reputational damage.”

“I can’t imagine anyone doing something like that now. It’s so baked in that you have to be clear about how your platform operates,” they mused – but fears of a potential recurrence are high.

“People are concerned whether they can genuinely know who the counterpart is in that hosted room. And the thing is, you don’t know,” Kinak observed. “You have to believe that the venue operating the hosted room is doing things appropriately and legally.”

While that might make the prospect of a private room seem more risky, it’s no different from the situation in any ATS or dark pool. “I find it funny that there’s this narrative of deception in private rooms, because it can happen anywhere. You just have to trust the operator,” Kinak observed. “If I go to the largest ATS, request to only interact with a particular group of market participants, and they tell me they’ve codified it that way, I just have to believe them. There’s no way to verify what they’re telling me.”

Clearer waters

As such, uncertainties around private rooms are fuelling a wider conversation – ATS regulation as a whole. Currently, in the US, ATSs are obliged to report all trades and orders to FINRA under the CAT regulation. CAT was designed to prevent manipulative trading strategies and tactics, Mark Davies, CEO and co-founder of S3, explained, seeking to provide a clearer, more transparent picture of the market after the 2010 flash crash.

The number of shares executed must be disclosed, but not where or who with. As such, the broker actually doing the trade can remain anonymous – and may be far more present in a certain stock or market than they appear to be. This has been used as a reason to illegitimise private rooms, driving concerns that if market giants are sneaking into private rooms, they could be eating up much more of the pie than it seems.

Mark Davies

However, this is part of broader ATS regulation rather than the small private room subsection – regulation that many players have less issue with when it comes to dark pools.

Platforms are also subject to Rule 605 and 606. The former, an order execution quality requirement, is receiving an ATS-specific update at the end of 2025. “Previously a firm like UBS didn’t have to separate out their ATS flow from their main broker dealer flow or their STP flow. Now that has to be reported independently, and there are quite a few more statistics than there used to be,” Davies explained.

Rule 606 obliges brokers to disclose where orders are routed to. This is a hazy area for ATSs, Davies said. “An ATS is generally considered a terminal venue for 606 purposes, which means it executes and therefore they don’t have any onward routing that needs to be reported.

“However, a lot of the ATSs have routers that they run in tandem. If an order is sent to an ATS or private room as an execution venue via a router, then the firm would have to disclose that. The ATS, in turn, would not have to disclose any onward routing.”

When ATS trades are reported, it is not specified where the execution took place. It may have been completed in a dark pool, via trajectory crossing or in a private room – no one, aside from those taking part in the trade, can say for sure. This is one of the transparency hangups people have with hosted rooms and ATSs as a whole, arguing that the non-granular reporting practices are wilfully opaque.

With all the furore around private rooms, it could easily be assumed that they are taking a significant chunk of the flow. That’s the opposite of the case, according to the IntelligentCross spokesperson. “It’s a single digit percentage of our overall volume,” she said, while Kinak cited a less than 10% figure for the amount of ATS flow going through private rooms.

“It’s not significant, but they’re willing to be transparent about it,” he said.

Under the SEC’s ATS-N filing requirements, providers do not have to answer questions about private rooms they provide. The number of rooms on offer, the counterparties involved, fees, and volumes can remain under wraps.

“Transparency around their size, their meaningfulness, is valuable,” Kinak said. “If people can see that an ATS has 2% of total market share, and that 2% of that share is in hosted rooms, they’d realise that there’s no big story. On the other hand, if half of that market share is made up of private room volumes, that changes the narrative. People generally want to concentrate their orders in venues where liquidity is accessible.”

Whether ATSs and private rooms should be more regulated and transparent is a contentious issue. Some argue that more transparency is always a good thing. “I absolutely support additional transparency and regulation around how private rooms are operated,” Kinak asserted, “and I don’t think anyone would be opposed to that. Both the venue operator and the person hosting the specific room would be happy to provide transparency, because they’re not doing anything sinister. They’re hosting the room so they can interact with certain people or a specific segment of the market.”

Others, though, don’t see it the same way, arguing that greater disclosure demands would go against the point of the format. “We can’t necessarily see where flow is coming from,” one person familiar with the subject said, “but that’s by design – we’re not supposed to know. The breakdowns within individual pools are in the hands of the subscribers, not us. People are looking for data on this, on things like retail versus institutional participation, but that’s not consistent or available.”

This is not an opacity issue, the IntelligentCross spokesperson asserts. “Hosted rooms are another tool in the trader’s toolbox in their efforts to access liquidity but not move the market.”

Smart does not see the need for anything to change. “ATSs are perfectly within their rights to create segmented pools of liquidity. Hosted rooms exist in plain sight, in a regulated environment,” he said.

Building trust

Although the amped-up rumours about private rooms are unfounded, they point to a wider demand for transparency – and a lack of trust in the industry. While some are calling for the introduction of new or more comprehensive regulation across alternative trading systems, it is likely that any changes will be put on ice for now.

“Realistically, I don’t think we’re going to see a lot of new regulations in the next four years,” Davies commented. “We’re more likely to see a reduction, particularly in restrictive regulation.”

As market participants continue to seek out alternatives to the lit market, new ways to avoid information leakage and access to the best liquidity available to them, the emergence and popularity of systems like private rooms will inevitably grow. Whether the industry will learn from past mistakes, keep a close eye on platform regulation and play nice is less certain.

It’s a thorny issue, but one thing’s for sure: don’t believe every rumour you hear on the street.

Powered by research

By

Nick Dunbar

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May 6, 2025

The world’s foremost experts in trading and market microstructure and their youthful research team have turned Capital Fund Management (CFM) into a hedge fund giant whilst employing almost no traders. Nick Dunbar spoke with CFM’s co-founder Jean-Philippe Bouchaud.

Walking through Paris’s Left Bank to the offices of Capital Fund Management, it is easy to forget one is visiting a financial institution. Students from nearby Sciences-Po throng the streets, not investment bankers, and a similar relaxed, youthful vibe pervades CFM’s offices. That is exactly how CFM co-founder and chairman Jean-Philippe Bouchaud likes it.

“Junior people have direct access to the founders of the firm,” he says. “The hierarchy is very flat, I don’t know how many firms work like this. But I think it’s very common in universities that you go and see a Nobel Prize winner that’s working in your department. He sits in his office, opens his door and discusses with you.”

The difference is that this ‘university department’ is a US$17 billion hedge fund running a portfolio of diverse, systematic strategies. With eight times leverage, holding thousands of different stocks, futures and options, with a 20-40 day median lifetime, CFM trades hundreds of billions in volume per year.

But the real surprise is that the firm employs almost no traders, relying for the most part on algos designed by its 100-strong team of researchers and 200 developers. Other than financing, CFM uses no broker algos for trade execution. It is just as well that Bouchaud, and co-founder Marc Potters, are considered to be the world’s leading experts in the theory of trading and market microstructure.

“For us, market structure is really important, because unlike other firms who go through brokers who execute their trades, all the execution is done in-house” Bouchaud says. “So we’re extremely interested in market microstructure.”

Before speaking to Bouchaud, it helps to have read his 2017 monograph ‘Trades, Quotes & Prices’ (co-authored with Julius Bonart, Jonathan Donier and Martin Gould). Packed with equations, the book embodies CFM’s guiding philosophy, which opposes the ‘efficient market’ economics dogma, according to which prices reflect new information.

“We believe that most market moves are really due to impact of others,” counters Bouchaud. Years of painstaking analysis have turned this into a money machine. “We have a saying, which is that ‘the impact of others is our alpha and vice versa’.”

Rather than the traditional buyside approach of deciding on portfolio allocation first and execution afterwards, CFM starts with the execution problem first, because its profits are so sensitive to it.

“There are really two main sources of costs,” explains Bouchaud. “One is spread. And in this case, you can try to be smart about when you trade.” With CFM’s access to exchange central limit order books, this means shadowing the market makers, and building algos that exploit patterns in their behaviour.

“Typically, there’s a game, which is pretty high frequency, although, of course, we’re not high frequency traders, we’re not market makers,” he adds.

“We’re directional in our trades, and our trades tend to be autocorrelated in time, for hours, days, sometimes weeks. But it’s still important to be high frequency, to compete with high frequency traders and see when they’re putting a spread that’s too tight or too large, and try to get this very high frequency information about when to trade: if you want to wait a few seconds for the trade to go back down, or spread to go back down, or for the price to go down, if you want to buy and so on.”

Jean-Philippe Bouchaud

But CFM has no interest in becoming a market maker itself. “They need to be first in the queue, so if they are executed, they can actually earn the spread,” notes Bouchaud. “We are not trying to earn the spread. We’re trying to save costs, which is a very different concept, and therefore, spending millions to build an infrastructure to save a little bit of cost is not worth it.”

The impact of market impact

Perhaps the core of Bouchaud’s academic research is in the elusive concept of market impact, which is a huge concern for CFM. “The second major part of our cost is impact cost, and that’s much more subtle, because this is something that’s entirely statistical,” he says. “Fifty per cent of the time you buy and the price goes down. But of course, it doesn’t mean that you don’t have impact.”

“A lot of the time brokers are given a trade, and they’re told, ‘Well, if the price goes too high, you stop trading. You don’t execute everything I want’,” Bouchaud explains. “We’re not doing that at all. We decide on the size of a trade, and we’re going to trade no matter what. Even if the price goes up, it doesn’t matter, because we know that on the other side of our portfolio there’s an asset for which the price will go down the same day, or later on, anyway.”

“In portfolios like ours, which are extremely large and that tend to turn over reasonably frequently, over a year or 10 years, we’re going to turn over quite a lot on a given stock. But also, we’re typically trading 2,000-5,000 stocks, so we’re really interested in statistical averages.”

This high volume gives CFM a unique vantage point not enjoyed by typical buyside firms. “When you average over a large number of trades, you see that on average, when you buy, you put the price up. And it’s a small effect. It’s a fraction of the volatility that happens during the same time scale during which you execute your trade. That’s why you don’t see it on a case-by-case basis. This is the impact.”

“It’s a very subtle cost, but it’s huge, so even if this is very small compared to vol, it is a substantial fraction of the cost for us, and it’s a cost that scales,” Bouchaud says, explaining how it curtails CFM’s profits. “It’s our main issue in terms of dollars extracted from the market.”

The explanation hinges upon Bouchaud’s academic research, where he is famous for his theoretical underpinning of the famous square-root law of impact versus trade size.

“The spread cost scales linearly with your volume,” he continues. “The more you trade, the more you pay proportionately, whereas impact cost scales itself as the square root of your size. So what you pay is your size times the square root of your size, but what you expect to gain is just your size.”

“This thing is bad because at some point you start losing money and that limits the capacity of funds.”

Nothing at CFM would be complete without a scientific experiment to back it up. “We’ve done a random trading experiment,” Bouchaud says. “And we see that on the time scales where we can measure impact, it doesn’t matter whether our trades are random – whether we flip coins and decide to buy or sell, or are motivated by some signal. They’re just indistinguishable.”

The subtle effect observed by Bouchaud is completely different from the complaint of information leakage made by traditional buyside traders, he points out. “It’s statistical, that there’s more buys vs sells at a given instant of time, and so the market, on average, reacts to that, but it’s not that some people detect something and spot you.”

For Bouchaud, information leakage is why he avoids bilateral trading. “This would happen on an OTC market, where you say, hey, I want to buy something, and so you’re detected. So that’s why we’re not on OTC markets or very little, because you can’t be anonymous.” CFM keeps a cap on individual stock volumes for this reason, he adds.

For similar reasons, Bouchaud distrusts dark venues. “Because it’s dark, it’s more scary because we don’t really know what’s going on there,” he explains. “I think there’s a little bit of illusion among the buy side about these venues. People who have large quantities to trade, it’s not clear that they wouldn’t be better off just trading on the lit market in a continuous way; that is, not execute their trade in a single go, but spread it out on over one week. It’s not that clear that they would get a worse deal. The problem with dark pools is that they’re dark, at least for us.”

Using lit venues allows CFM to conduct endless trading experiments, Bouchaud continues. “Doing all our execution in house, we always have different models running in parallel as a horse race,” he says. “We use different trading schedules throughout the day. Half of the pool of the stock uses one trading schedule, like front loaded in the morning, then decaying over time, or vice versa. And we compare the two. Because we’re trading so many stocks, after a few weeks or a few months, we get statistical results that make sense.”

That isn’t to say these results can always be trusted. “The delicate thing, which is the predicament of quants, is how to get rid of all sorts of biases,” he points out. “But also, for example, when do you do these randomised experiments. Are you sure that you’re really, truly random?

Jean-Philippe Bouchaud

“Suppose I use six months of data to compare two execution models. One seems to be statistically better than the other one, and we’re going to trust this result and go for it, because we know that having a true statistically significant difference in a way that would justify you publishing in a paper is close to impossible.

“There can be also changes of regime that you haven’t thought about when you were doing your experiment. For example, you’ll be happy with your models, and then suddenly there’s a change of regulation, where the spread, or a tick rule suddenly changes.”

Alpha signals

Having tested execution strategies, CFM finally comes to the area that would be considered foremost at a traditional fund – alpha generation. And here, Bouchaud is acutely aware of the in-sample bias that deludes investors into chasing spurious signals. “In terms of alpha, with longer term signals, although you spend a lot of time trying to avoid the in-sample bias, it’s extremely difficult,” he warns. “We had models which we thought were well designed that we had to turn off because they were not.”

“One reason is just pure in-sample bias, the fact that the signal is pretty weak, and you’ve over-fiddled with your parameters, and thought that you found something that actually doesn’t work,” Bouchaud explains. “There’s something else, where you’ve really done your work properly, but then a lot of people simultaneously find similar effects, or signals, and start trading them.”

This notorious problem of crowding is a double-edged sword. “It can go both ways,” Bouchaud says. “Sometimes the fact that they’ve starting trading them enhances the signal. In other cases, it makes a signal disappear or go too fast for you to trade, or increases your costs to trade the signal. Your access to the signal becomes more expensive because of what we call co-impact. You think you’re going to have an impact which is square root of your volume Q, but it’s square root of 10 times Q, because simultaneously to you, there are 10 other people trading the same Q. And so suddenly your cost is much higher.”

The problem of co-impact powers an arms race between CFM and other systematic hedge funds. “This is the reason why we and our competitors, I guess, need to hire more and more researchers because we need to innovate, get more models, understand better all these aspects to avoid in sample bias, degradation of alpha, and crowding.”

Left in CFM’s wake is a trail of discarded strategies that have been discovered and over-exploited, such as the tendency of the idiosyncratic or non-beta component of stock returns to mean-revert. “This is a well-known statistical effect, but it’s nearly gone now, in terms of alpha generation. It’s so well-known and so traded that it’s very difficult to make money on these things that become commoditised.”

On the other hand, some strategies seem to thrive when imitated, such as trend following. “Trend following is amazingly robust and it’s still performing. For example, we have a trend-following fund which made around 19% last year, and it’s been extremely good in the last 10 years.”

“There’s a portfolio effect where you need to diversify trend following on many different underlyings. And what we’re trying to tell our clients is that it’s not only trend following on the major factors, it’s also trend following on spreads, between contracts and things like that, that you need to include.”

Trading against Black-Scholes

One portion of CFM dear to the founders’ hearts is option trading, which dates back to the fund’s creation under its previous title of Science and Finance, in 1994. “The initial motivation to create Science and Finance was really option pricing and to create an option fund, which we progressively built and started trading 10 years later,” Bouchaud recalls.

After studying option pricing, he and Potters became convinced that the universally accepted formula used on Wall Street was flawed. “It is really believing that Black-Scholes is wrong and that you can do better than Black-Scholes in having a normative price to which you can compare the market price,” Bouchaud says. “Now the vol programme is diversified in all sorts of directions, but the basic initial model was really believing that you can do option pricing much better than what the market does.”

Conveniently for CFM, the terminology of option pricing helps entrench the mispricing. “When you give people the language, it’s extremely difficult to get rid of that language. What you need to do is to keep the language, but progressively try to tell people that they should not give the same meaning to the words that they were using for years. Like implied vol or delta.”

However, Bouchaud warns that this money machine is liquidity-constrained because “liquidity is scattered between different maturities and strikes”. This explains CFM’s breakdown by contract type. “It’s mostly futures and stocks, half and half and 10% in vol. It’s really hard to get big in the vol space.”

When it comes to risk, Bouchaud highlights two areas that affect CFM. One is the emergence of new systematic factors, such as during the Covid pandemic.

“There’s been a few major events that hurt CFM badly,” he recalls. “One of the recent ones is the day [9 Nov 2020] when Pfizer declared that they had a vaccine. Suddenly, there was this very strong divergence between two hemispheres of the industry, one which relies on people staying home, and one which relies on people going out. And, this thing was not really expressing any risk before the pandemic. And then became very important. If don’t have the tools to detect that, you can get caught very badly.”

The other risk is inherent in the fund’s use of leverage. “There’s less leverage on futures than stocks, but if you want to trade market-neutral portfolios of stocks then you need leverage, to enhance the volatility.” The problem comes when other hedge funds are forced to deleverage.

Jean-Philippe Bouchaud

“There are these hidden latent risks that realise themselves” Bouchaud says. “For example, the 2008 quant crunch. This is really a major concern, to try to be sure that these types of mass de-leveraging don’t affect you.”

In August 2008, CFM had a lucky escape, Bouchaud remembers. “Fortunately, we had very strong signals that were indicating that something really strange was going on in the market. And so we were able to deleverage our book before the big day.”

Harnessing technology

Artificial intelligence is one area that CFM is focusing on. Noting that the latest large language models give PhD-level responses, Bouchaud warns that widespread adoption in the investment community is inevitable. “As far as I can see, either people get crazy and use these black boxes and make really completely autonomous robots to trade, and then there’s a problem of crowding out.”

Bouchaud’s answer is to keep humans at the heart of the process. “We will use these tools, but every model, everything that’s going to go in production at the end of the day, will have to be rubber stamped by someone who puts his skin in the game. It’s not going to go out of whack, because there’s this restoring force, which is personal responsibility.”

And CFM is hiring new AI experts from academia, he adds. “We’ve just created something that we call the machine learning lab, which is going to be a kind of internal AI consultant and will be publishing papers.”

Meanwhile, CFM’s IT team turns academic-type strategy ideas into robust algos. “There’s a research code, and there’s a production code, for which the oversight needs to be much stronger, and then we need to be sure that there’s no problem,” Bouchaud explains. “We have professional coders that ensure that the whole production chain works. It’s like a factory every day, minimal level of errors. So that takes time, and a lot of people.”

“We have 200 developers, from the start we’ve seen a ratio of one researcher to two developers. IT means developers, but also data science.” Ensuring reliable sources of data to power the firm’s statistical trading models is a constant headache, Bouchaud says.

“Every day we discover a new data source somewhere. And there’s a huge business around providing data to people. The problem is that some of these data sources are extremely interesting and contain information, while others are cooked up and can’t be trusted.”

While CFM continues to use Bloomberg and other traditional sources, because others look at them, the firm’s developers are building their own data sources as well. “Scraping the web and creating your own data is very important,” Bouchaud concludes.

Jean-Philippe Bouchaud, is co-founder and chairman of Capital Fund Management (CFM), adjunct professor at École Normale Supérieure and co-director of the CFM-Imperial Institute of Quantitative Finance at Imperial College London. He is a physicist and member of the French Academy of Sciences, and in 2020 held the Bettencourt Innovation Chair at Collège de France.

Demystifying the Dragon

By

Lucy Carter

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May 6, 2025

Thanks to technology and automotive innovation, the Chinese equity market is re-piquing investors’ interest – but some are concerned about opacity in the region, and restrictive algo trading practices that could make it hard for international investors to get a foot in the door.

Global Trading explores some of the most recent changes that have come into play, considering whether the Chinese equity market is as scary as people think.

Algo trading

In October 2023, China introduced a new slate of algorithmic trading rules with the goal of preventing “abnormal trading activities” and improving overall market stability. Avid support for the changes is voiced by Jacques Lemoisson, founder of Gate Capital Management, who has serious apprehensions about algorithmic trading practices globally.

“In Europe, there are too many algos,” he asserted. “They need visibility of the market to work, and exchanges in the US and Europe allow them to read the order books.

“They can also, and this is concerning from my point of view, populate order books.” He highlights the issue of shadow orders, a form of insider trading whereby investors buy or sell securities with knowledge of companies linked by economic or market factors.

“The issue is that when volatility is going mad, the algo just withdraws its orders,” he adds. “You think that you have plenty of liquidity on the book, and then when you send the order the algo withdraws on you and your order is scratched.”

As such, Lemoisson believes that China’s decision to ramp up algo surveillance was a smart move. “They understood that international – and some local – systematic and algo funds were using their visibility to play against the market.”

“Limiting order book visibility for algos was brilliant, for me. It makes it tougher for the monster firms to be efficient,” he adds. Rather than restrictive, he argues, this is an equalising change.

Jacques Lemoisson

The Shenzhen and Shanghai exchanges are described by one market participant as “difficult” when it comes to regulation. Guidance sits in a grey area, they say, without clear guidelines on what is and is not permissible.

Melody Yang, funds and regulations partner at Shanghai Yaowang Law Firm (the strategic alliance firm of law firm Simmons & Simmons in China), agrees that algo trading rules have, to date, been evolving yet with certain areas to be further clarified on. “For a long time, people have been wondering whether programme trading is legal or not in Chinese equities,” she says. “It’s fair and important for the regulators to explain what the rules are and recognising the strategy itself as legitimate.”

There is still a way to go though, she adds, with many industry players waiting for further guidance on how they can interact with the market. “Our global clients who really want to use their own algos to generate or execute strategies are going to have to wait for other parts of legislation to come into play before they can meaningfully trade the equities market systematically, for example, the rules on allowing for direct market access (DMA) which was restricted for quite some time,” she says.

Melody Yang

Under the updated regulation, algo trading firms are required to disclose a number of details about their models before being allowed to trade on the mainland. The rules are enforced through increased surveillance from onshore brokers and exchanges, including via on or offsite inspections of any algo trading parties at any time. For firms that pride themselves on their secrecy and proprietary technology, this is a lot to accept.

Those coming under the scope of these regulations are broadly defined as investors with a high degree of order placement automation, high-speed order placement, high turnover rates and those using self-developed or customised software. However, there is a flexibility to these guidelines; exchanges can determine if other firms should be subject to the rules.

Firms must provide their algo trading strategies, with an explanatory description, their trade order execution methods, the size and source of investment proceeds and their leverage ratio. They must also share their highest frequency of inputting trade orders, with a threshold set at 300 per second, and the largest number of orders they will place on a single day, with a cap of 20,000. If these limits are breached, firms could face categorisation as high frequency traders, even closer surveillance, potential disciplinary measures, and may be asked to disclose their server location, a test report and a contingency plan in case of malfunction.

By contrast, Eurex has an upper limit of 250 orders per second for each connection, with a maximum of 600 such connections permitted per firm, which in principle would allow a single firm to send up to 150,000 orders per second.

Concerns have been raised by some market participants that these rules limit firms’ access to the country, with disclosure requirements preventing them from trading to the best of their abilities. However, those familiar with the market are less worried by the changes.

One trader operating in the market argues that the changes are not as scary as they sound – and are not, as many assumed, an anti-algorithm initiative. In fact, there are several similarities between China’s new requirements and those already laid out across the US and Europe, they said.

For international investors already active in these markets, the day-to-day impact of these rules is minimal, the trader continued. The majority will not breach the execution restrictions, and the bulk of the work involved in compliance takes place at the onboarding and pre-trade stages.

With these rules, Chinese regulators are pushing for more transparency – the very thing that global players have been asking of their markets.

A source familiar with the issue explained that more concerns were raised by the sell side, citing initial “extreme concerns” about the impact the rule could have on cancellation rates. However, these algorithms have recalibrated and bounced back, they said, while quant firms are slowing to a mid-frequency pace to align with requirements.

“Some China onshore vendors have introduced controls to align with the requirements, and others were thinking of putting in a speed bump to ensure that activity doesn’t breach thresholds and to minimise administrative reporting, but I don’t think it has impacted overall business much given the current reporting scope is China onshore,” agrees Kitty Li, APAC co-head of execution services for global markets at UBS.

Contrary to public perception, the current rule doesn’t drill too deep into the details of how an algo works, Li continues. “From a broker side, we just have to give a very general description. It’s quite a common practice.”

Kitty Li

“Nevertheless, we need to monitor the implementation of the Stock Connect Northbound programme trading reporting rule closely, as it affects a much larger number of international investors accessing China through various brokers. Managing the reporting for the programme trading can be expensive.”

International investing

International investment plays a significant role in China’s efforts to boost its economy. However, accessing the country’s stock market is a more complex process than foreign investors may be used to.

There are two routes on offer for investment into China. Through the first option, the Qualified Foreign Institutional Investor (QFII) programme, international firms register for a licence to trade A-shares of Chinese stocks on the Shanghai and Shenzhen exchanges. Introduced in 2002, the initiative was instrumental in China’s economic expansion and opening up to global investors.

Since 2014, investors have also been able to access Mainland China markets through Stock Connect. Through a partnership with the Hong Kong Exchange (HKEX), clients can invest in Mainland markets without onshoring any capital. This has become an increasingly popular option since its introduction, taking the majority of international flow. According to one source familiar with the service, up to 90% of institutional clients are employing the service.

The reason for Stock Connect’s success is broadly down to convenience. Investors do not have to move their money onshore, which gives them more flexibility, can reduce latency and removes the issue of capital repatriation. “You don’t have to pre-fund, and you don’t have to dedicate yourself to one broker,” Li explains, something that QFII requires.

Although QFII offers the ability to trade a wider range of stocks and use block trading, this often isn’t enough to draw investors in.

“There are about 5,300 stocks listed in Mainland China. Stock Connect covers around 2,700, but that’s about 90% of the market cap. So for the majority of clients, that’s probably good enough,” Li comments. Quantity is less important than quality, for many investors.

Similarly, block trading is an appealing prospect – but the lack of liquidity onshore means that the chance of crossing a trade is continually dwindling.

In a potential bid for further market share, the Hong Kong Government announced in its latest budget speech that block trading would be introduced on Stock Connect within the next few years. The confirmation came as the country seeks to build on its connection with the mainland.

Market participants are confident that this will have a positive impact. “It’s an enhancement from a liquidity perspective,” Li affirms. “We often try to match up clients with buy and sell interests, but sometimes only one has it.”

“Pure equity investors are more likely to opt for Stock Connect, but we still get a lot of client enquiries about QFII,” Li says. “It gives you a lot more access if you want to cover different asset classes. You can trade commodities futures, access IPOs in China A-shares – and you can also trade equity futures, for example. That’s not available via Stock Connect.”

“There is also the option for short selling,” Yang adds. “For a lot of investment banks and hedge funds, it’s difficult to get their shorting strategy approved. “For most investors, the disadvantages of Stock Connect are tolerable at the moment, but QFII can give people an edge in areas like futures, where they can profit substantially. Overall, though, the gap between the approaches in trading equities is marginal.”

One trader notes that when volumes in China soared last October following announcements of economic stimuli, the percentage share of Stock Connect Northbound turnover showed a minimal drop. If this had been more drastic, it would have demonstrated that market activity was concentrated on onshore trading. With the figure remaining fairly stable, it can be surmised that investors are continuing to favour the HKEX investment route.

Limiting data access

On 13 May 2024, Stock Connect market data availability changed. Suddenly, real time buy and sell net data flows were no longer shown for Northbound flows.

HKEX, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) first referenced the measures in April. On both the Northbound and Southbound connections, the real-time available daily quote balance is only shown if it falls below 30%. In all other cases, it is listed only as ‘available’.

Northbound, real-time buy, sell and total turnover data has been removed. In its place, users can see historical daily and monthly total market turnover, number of trades, and the turnover of ETFs and the ten most active stocks. The short selling balance for individual stocks is tagged as ‘available’ unless it falls below 300,000 shares. This has cut down the amount of colour that traders can access, making the market more opaque.

For many in the industry, a reduction of data availability and the thought of a less comprehensive picture of a market is concerning. It was also an unexpected choice for Chinese regulators to make, given that foreign investment into the country was already dwindling at the time.

HKEX stated that the programme has been amended to align with Mainland A-share market practices. However, some suggest that it could have been down to a desire to downplay a sell-heavy environment and the impact of foreign investors on the market.

Those whose businesses run on providing market colour to investors will be hit hard by the move, but from a trader’s perspective it is not necessarily a major loss. Data on individual stocks, which is more commonly used to trade, is still available.

Stimulus package

The last few years have been eventful for the Chinese equity markets – and not in a good way. Expectations that the country’s manufacturing and financial status would be surpassed by India, an unrelenting real estate crisis and a stock market falling well behind global benchmarks painted a bleak landscape for the region, with rapid international outflows and a burgeoning trade war with the US only enhancing the crisis.

Last September, though, a governmental stimulus package prompted a rally in the market, with a five-year plan including monetary easing, support for the property sector and bond issuance programme to tackle local government debt encouraging reinvestment in the country.

“These were great headlines for people to look at China again. They drove a lot of volumes in Q4, and prompted record days for the market,” Li observes.

However, the excitement of high volume during this time was dampened by significant deviation in daily turnover. A trader in the market suggests that a second rally, which took place after the reveal of the DeepSeek AI model, was a better indicator of a strengthening market. Deviation was less drastic, and liquidity improvement more significant.

One source familiar with the issue agrees that the effects of the stimuli have not been immediate, arguing that they have not meaningfully or practically filtered through the market. The headlines are there, they suggest, but the degree to which investors believe their claims is less solid. While liquidity and equity conditions have improved somewhat, it is still up in the air whether the long-term effects will meet expectations.

Li sees the stimulus package as having a longer tail when it comes to market improvements. “The impact wasn’t overnight – it takes the offshore space time to understand what China is trying to do,” she says. “However, we’ve had a lot more inquiries from investors. The international money is coming back in.”

Conclusion

While there is an aura of mystery and suspicion around the region, much of this is the result of cultural and political perception rather than real market conditions. Many regulations and structural points of the Chinese equities market initially seen as obfuscatory are, in reality, closer to leading developed markets than many expect. While it is true that investing in the country’s markets requires an idiosyncratic approach, inaccessibility has been greatly overstated.

As China’s economy shows persistent signs of revitalisation, and particular sectors like technology and electric vehicles boom, this is a market that cannot be ignored.

Iress: Future-proofing trading desks

By

GlobalTrading

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May 6, 2025

Global Trading spoke with Iress Product Manager – Trading, Kyle Marais, about the challenges legacy platforms pose for trading desks, and how interoperability and cloud technology are shaping the future of trading.

What challenges are capital markets and trading desks facing due to legacy platforms?

Legacy platforms were often built to support single-asset, region-specific trading. However, today’s capital markets demand multi-asset support, global reach, and the ability to adapt quickly at scale.

Disjointed workflows arise when firms operate with multiple data sources and proprietary systems that do not integrate. As a result, traders frequently switch between different interfaces, tools, and platforms to complete a single trade creating inefficiencies that legacy systems struggle to support. Limited integration with modern technology makes it difficult to onboard new trading venues, while rigid workflows restrict operational firms’ ability to adapt to market changes.

These fragmented workflows are further compounded by siloed data, further undermining operational efficiency. Critical market, order, and trade data remains scattered across disconnected systems, preventing firms from achieving a unified view across the full trading lifecycle. Legacy formats require extensive transformation, hindering data-driven decision-making and limiting the adoption of AI and analytics.

Operational costs continue to rise as aging systems demand heavy maintenance and custom integrations. Expanding into new asset classes or regions requires complex development work and manual processes, both of which slow speed to market and innovation. Legacy infrastructure also lacks the resilience to withstand market volatility, increasing the risk of downtime.

How can these barriers be overcome?

To overcome these challenges, firms need to shift away from rigid, monolithic systems and adopt flexible, integrated trading solutions. This allows them to keep pace with evolving market demands while modernising their infrastructure, without disrupting critical trading operations.

A key enabler of this transition is interoperability. Instead of undergoing full system replacements, firms can integrate modular, API-driven components that connect existing infrastructure with modern trading venues, asset classes, and tools. This incremental approach minimises disruption, increases flexibility, and allows firms to evolve their trading architecture at their own pace.

Cloud-native technology offers a solution to enabling this transformation. By moving away from on-premise infrastructure, firms can reduce hardware costs, accelerate feature deployment, and improve system resilience. Continuous updates strengthen security and functionality, while elastic infrastructure supports scale, and adaptability, promoting self-healing during periods of market stress.

Breaking down data silos is another crucial step. Cloud-enabled data hubs, open APIs, and industry standards such as FDC3 enable seamless data-sharing across trading, risk, and compliance functions. By unifying data across departments, firms can improve analytics, reporting, and decision-making. Providing a consolidated view of market and order data allows trading desks to operate more efficiently and with greater confidence in their insights.

What is Iress’s approach to supporting this evolution?

At Iress, we’re enabling seamless integration between Iress applications, third-party tools such as CRM platforms and pre- and post-trade analytics, as well as proprietary front ends and custom content. This ensures that trading desks can create a tailored desktop experience which combines multiple technologies without disruption.

Cloud technology is central to our modernisation strategy. We are transitioning our platforms to cloud-native solutions that offer zero-install, multi-OS compatibility, ensuring users can access trading tools instantly. Leveraging cloud infrastructure also enables faster expansion into new regions and seamless scalability, without the need for additional hardware.

As part of this evolution, our product suite is also advancing. Iress Pro is evolving into a modern, cloud-based platform with modular widgets and improved tooling, ensuring that traders benefit from new capabilities without disrupting existing workflows. Iress EMS is a simplified, cloud-native execution management system designed for buy-side firms, unifying the user experience across asset classes, trading venues, and workflows. Iress’ cloud-native FIX Hub enables firms to access global markets and trade multiple asset classes through a single, frictionless connection, simplifying execution and connectivity.

How do you expect the demand for interoperability to evolve?

The demand for connectivity is only going to increase as market structures evolve. The rise of 24/5 trading, T+1 settlement, and alternative trading venues signals a shift toward an always-on, globally connected market. To keep pace, trading systems and workflows will need to communicate across asset classes, geographies, and platforms. Interoperability will be the foundation that enables firms to operate in real-time, eliminating inefficiencies and ensuring smooth cross-market execution.

Cloud technology is also levelling the playing field for mid-tier and growth-focused firms. Previously, access to broker networks, liquidity providers, and global exchanges was restricted to large institutions with extensive resources. Cloud-based infrastructure is now removing those barriers, allowing mid-tier firms to integrate faster, onboard new trading venues more easily, and connect with the broader trading ecosystem without the high cost of custom development. As the need for connectivity and speed grows, cloud-technology and interoperability will be a key enabler for firms looking to compete on a global scale.

Regulatory scrutiny is another factor driving the demand for interoperable systems. Frameworks such as DORA and APRA CPS 230 are reshaping operational resilience expectations for financial institutions and their third-party providers. Firms must now implement continuous risk management, strengthen vendor oversight, and meet heightened compliance standards. Cloud adoption and interoperable architecture reduce reliance on legacy systems, supporting continuous testing, impact tolerance, and stronger governance. By enabling better system monitoring, testing, and auditing, interoperable technology will help firms meet regulatory requirements more efficiently and with greater confidence.

iress.com

KCx: Bringing execution technology in-house

By

GlobalTrading

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May 6, 2025

Global trading speaks to KCx’s Chris McConville, Bobbie Port, Robert Miller and Serge Reydellet.

Breaking barriers: the innovation that’s reshaping execution

The execution landscape is evolving rapidly, and standing still is not an option. In an industry where technology is often outsourced or built for the market conditions of the past, we chose a different path – one focused on innovation. Bringing our execution technology in-house was not just a move toward greater efficiency or control; it was a strategic decision to shape our future with clarity and intent.

With full control of our technology, we are delivering more than just better performance: we are offering a tailored, responsive, and dynamic trading experience.

What inspired KCx to redefine its infrastructure with in-house technology?

Chris McConville, Head of KCx: Over the last 2 years, KCx has been embarking on an ambitious journey of reinvention. Through this journey, we began to reimagine what a modern trade execution platform could look like, incorporating open-source technologies and cloud computing into the very fabric of the platform. We did not want to upgrade just one aspect of our execution suite; we wanted to improve the entire suite.

The objective was to build a bespoke execution platform geared for agility and growth; with KCx Omni, we believe we have done just that. Supported by our partners, Adaptive, we have leveraged event stream sequencer systems to build a scalable, resilient, low latency next-generation trade execution platform.

How does owning your technology translate to delivering better solutions to clients?

Bobbie Port, Head of Electronic Distribution: KCx is leveraging technology not only to enhance performance but also to drive service delivery – an aspect that is often overlooked yet crucial for client success. Technology will empower us to deliver on client requests going from two to three deliveries a year to four to five every week. Our teams sit close to the code and the client, enabling fast, informed decision-making and support. This is a more direct model, leading to less friction, faster feedback loops, and ultimately better outcomes. In an environment where commoditisation is increasing, owning our technology stack allows us to remain flexible, client-led, and quality-focused. This is where we believe long-term value is created.

Owning our technology is a key differentiator in how we support clients and deliver solutions that matter. While much of the market is focused on internalisation and cost reduction, our priority remains on what clients genuinely value: customisation, agility, and service quality. By controlling our technology stack, we are able to move quickly. We are not dependent on external vendors or delayed by legacy infrastructure. This means we can adapt in real time, whether implementing a client-driven feature, tuning an algorithm, or adjusting to market dynamics.

Customisation is another core strength. Every client has different objectives, some are focused on alpha capture, others on execution quality, footprint, or workflow integration. Owning the technology allows us to tailor our offering precisely to those needs, rather than pushing a standardised solution.

How has client feedback shaped your decision to overhaul and internalise your technology stack?

Robert Miller, Head of Market Structure: Clients are instrumental in everything we do at KCx. We know that every trading desk operates with unique workflows and objectives – as the buyside and sellside become more objectively aligned, we need to provide more than out-the-box execution. Our clients’ insights made it clear that a one-size-fits-all solution wouldn’t suffice in today’s fast changing market. Clients depend on robust performance, not just execution performance, but resilience from a technology perspective too. They need a product that can be tailored to their specific operational objectives.

This understanding drove us to redesign our technology stack, ensuring that it is both high performing and highly customisable. Bringing our technology stack in house gives us complete control over the architecture, allowing us to swiftly integrate feedback and adapt to new challenges. This could be workflow changes from our clients or market evolution. It also gives KCx more flexibility to deploy different agents within the algo functionality as execution research continues to evolve.

Our continuous feedback loop ensures that as these conditions grow, our product remains resilient and forward-thinking. This strategic overhaul not only enhances our product’s execution and performance but also positions it to meet future market demands. Ultimately, the client is at the heart of our business, and by evolving our technology in line with their needs, we are building a platform that is flexible, scalable, and ready for the future whilst maximising execution performance.

How do these upgrades future proof KCx’s execution services?

Serge Reydellet, Head of Quant Execution: The changes discussed so far are just the beginning; every decision has been deliberate, ensuring that the solutions we provide will be scalable and grow with KCx. KCx Omni and KCx Spark will be the foundation on which we build.

The introduction of KCx Omni, an advanced event-driven equities trading system, marks a significant evolution in how trading components interact and scale. Powered by Adaptive’s event stream sequencer, KCx Omni acts as a central nervous system, seamlessly connecting components such as the Algo Centre, OMS/EMS, Vector TCA, IOI management, portfolio optimisation, AI agents, and the Quant Data Interface (QDI).

Most importantly, this will be a fully front-to-back solution controlling everything from pre-trade, post-trade, platform analytics, and trading interfaces, alongside robust risk layers. The technology is low latency, capable of managing high throughputs which can easily be deployed onto our user interfaces to be distributed to all our teams quickly and effectively.

KCx Spark, our next-generation Smart Order Router (SOR), has been purpose-built for low latency to improve liquidity capture. Spark optimises conditional and block venue performance through Level 3 order book insights and real-time execution inputs. With dark liquidity fully transitioned to Spark in the EU – and rollout across lit venues now underway – clients benefit from significantly improved outcomes in both dark and lit execution.

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Thanks to technology and automotive innovation, the Chinese equity market is re-piquing investors’ interest – but some are concerned about opacity in the region, and restrictive algo trading practices that could make it hard for international investors to get a foot in the door.

Global Trading spoke with Iress Product Manager – Trading, Kyle Marais, about the challenges legacy platforms pose for trading desks, and how interoperability and cloud technology are shaping the future of trading.

Global trading speaks to KCx’s Chris McConville, Bobbie Port, Robert Miller and Serge Reydellet.

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