By Christian Zimmer, Hellinton Hatsuo Takada
Your Russian Visa: DMA to Russia
Otkritie’s Tim Bevan describes the intricacies and idiosyncrasies of the Russian markets, and offers suggestions on how to effectively access the deep liquidity there.
How would you profile the firms that are interested in DMA to Russia?
There is an interest in DMA to Russia from prime brokerage desks because many of the hedge funds that use the global prime brokers have expressed interest in Russia, now that the liquidity has reached the point it has. It is worth pointing out that the liquidity in the local equity market is approximately $2.5 billion a day, and the derivatives market turnover is $10 billion notional a day. These are very significant and deep pools of liquidity. We are certainly seeing client pressure from different areas hitting Tier 1 banks, which in turn is reflected onto us. We are also seeing the big global electronic brokers looking to add Russia to their coverage.
There is sustained sell-side interest, but the other big pocket of interest we are seeing is from the low-latency, high frequency funds that utilize proximity hosting and co-location, who want to place hardware in Moscow and run their strategies in the electronic order books that are available there. There are many more of these types of participants now and they are often in London, New York, Chicago, Amsterdam, Paris and other parts of Europe.
How extensively are algos utilized in Russian DMA?
Obviously for a high frequency fund, the algo is the strategy. This is clearly different from execution algos, like VWAP, which are used to execute orders in a certain manner. Most Russian brokers have the most basic execution algos like VWAP, TWAP, icebergs, etc. It is a relatively new trend (i.e. 6-9 months old) for the big sell-sides to enter Russia, and many have not yet deployed their more sophisticated suites of algos into the Russian market.
Additionally, the Russian market itself, is quite unusual in that there is a lot of programming skill in Russia. The average Russian retail trader is quite often running an algo through an Excel spreadsheet with $10-20,000 worth of capital, so as regards alpha strategies, there is a lot of algo activity in the Russian market. In terms of execution algos, however, I think it has not penetrated this segment yet. As the sell-sides continue to move into the electronic market, the second phase will be to deploy their own execution algos and offer them to their main clients, but we are at the beginning of that part of the process.
With the majority of liquidity isolated in a dozen stocks, how would Russian DMA fit into a firm’s overall trading/investment strategy?
Liquidity is very concentrated in Russia. The top ten names account for the vast majority of liquidity, and even the top two or three probably make up 50% of the market. DMA is possible beyond the top 15 or 20, but it drops off fairly quickly thereafter. Obviously the big blue chip companies are where most of the interest is. Taking Sberbank as an example, there is no liquid Depository Receipt (DR) and there is an unsponsored DR trading of about $2 million a day in Germany. If you want to trade that stock, you have to trade the local market, where it trades between half to a billion dollars a day notional, so there are some very deeply liquid companies that are only available in the local market.
What other asset classes are being attracted or will attract DMA interest?
The biggest interest is in the RTS Index futures, which is an incredibly powerful product. Trading over $5 billion a day notional, more than double of all of Russian equity instruments (both DR and local), sometimes by a factor of two. RTS Index futures trade from 0700 UK time right through to the US close and are among the top ten most liquid equity index futures in the world. This instrument has generated the majority of interest from the quant funds, but interest is increasingly coming from more standard hedge funds and buy-sides where they are allowed to trade futures as it provides an instant hedge or leverage tool with an almost bottomless liquidity pool for any one player.
There is also good liquidity for four or five single stock futures and Dollar-Ruble contracts. Obviously trading a single stock future is more capital efficient than trading the underlying cash, so we are seeing an upturn in interest there as well.
What is the state of connectivity into the Russian exchanges?
From a technology viewpoint, the connectivity picture is fairly ‘vanilla.’ The MICEX platform is based on NASDAQ technology, whereas the RTS FORTS platform is a Windows-based SQL interface. RTS has struggled to keep up with the increased activity and order rates associated with high frequency players. In particular, it takes 15 milliseconds for RTS to confirm an order and they send out data with a 100 millisecond delay. If traders want a direct API connection, it is possible on both exchanges. Also, both exchanges have co-location facilities, though eye-wateringly expensive in the case of MICEX. With the exchange merger having now been announced, we recommend that clients use a proximity hosting solution until we get a clearer road map as to where the matching engine is going to be physically located.
An unusual aspect of Russian markets, however, is their pre-delivery. The cash market is a T+0 market. Unless you have the assets on the account with the executing broker, the exchange will reject the order. If a high frequency trader wants to run a strategy, they must have a basket of stocks and cash on the account for them to trade that strategy. Pre-delivery involves significant prefunding and that adds an element of cost. There are also limitations in stock availability around corporate actions or dividend dates.
The result is that risk management happens almost entirely at the exchange level and that traders are limited to the assets that they or their broker can provide. The equity repo market in Russia is deeply liquid, to the extent that repurchase agreements are an on-exchange transaction. Russian brokers need to have a significant equity finance operation with which to provide theseservices to international clients.
How does your technical platform minimize latency, for example, from London to Moscow?
One of the biggest issues with emerging markets is often the availability of information. In particular, the kind of granular detail needed to minimize latency and understand the exchange’s technology, the data streams and how it can be optimized. From a local perspective, having a presence in the data centres, understanding the local line providers and precisely what type of fibre as well as the routes and hops involved, are all key.
This is not easily accessible data and it takes time to build a knowledge base and an understanding of how the infrastructure operates within Moscow. In short, traders encounter the same challenges as in any market, but the real challenge in Russia has been getting information. This is because, in many respects, we are educating the exchanges as to what this type of trading means and what matters to low latency traders; until about a year ago, sub-1 second was considered low latency.
I think the exchanges are going through what the western exchanges went through about ten years ago. It is difficult economically, because they are getting increased orders but not executions. They have taken a natural route, which is to limit orders per second to preserve core matching engine performance, but there are still spikes and delays. Any developments have been put on hold while they decide the future look of the market, but RTS and MICEX are likely to combine on a single technology platform in 2012.
The exchanges are in a fortunate position in that there are off-the-shelf, high capacity matching engines at fairly low cost because the US and Europe have been through this already, so the technology is readily available. The key points are that electronic access into Russian markets, whether latency sensitive or not, is rapidly growing in interest. The exchange merger is part of a broader project to make Moscow the regional financial hub and an international participation from the Russian markets and this is likely to grow exponentially over the next five years.
Secrets Revealed: Trading Tools Uncover Hidden Opportunities
John Bates of Progress explains how complex event processing works and how it can simplify the use of algorithms for finding and capturing trading opportunities.
A brief summary of Complex Event Processing
Complex Event Processing (CEP) is about treating actions that happen all the time as specific events, which describe the action, and then being able to analyze those events as they are streaming through a system, while looking through them for patterns that create opportunities or threats. In the trading world, this means things like trading opportunities, such as monitoring a set of instruments across multiple trading venues and looking for particular patterns. Those patterns might be high frequency trading (HFT), statistical arbitrage, correlation relationship between two items, or even execution algorithms that are slicing orders based on some predefined metric.
The threats often focus around pre-trade risk. For example, will placing the trade exceed predefined risk levels, or run into potentially abusive trades, like a wash trade. CEP is about being able to monitor business in real-time to analyze what is happening now and, based on that, to try to predict what is about to happen and act on it immediately.
The value of Complex Event Processing
The world of trading is so fast moving. Research done by the AITE Group suggests that the average lifespan of a trading algorithm can be as short as three months. This is because new trading patterns are constantly coming to light and ones that might have been very successful might no longer be available as the markets become more efficient. In the old days, trading algorithms were like a cottage industry, in much the same way as the making of muskets used to be. Highly paid and highly skilled craftsmen would handcraft the algorithm. It was the domain of the very rich and not very many could be involved in the game.
With the advent of CEP technologies in the last ten years, now anyone can find patterns in fast-flowing data feeds, but more importantly, CEP provides the tools for business people to describe new algorithms quickly. This means that traders can keep up with a trading world that is moving ever faster, and which the handmade craftsmen struggle to keep up with. Suddenly, it has become easier for smaller firms to create algorithms to compete with the larger ones. There has been a revolution in software for the trading space, in that firms of all sizes now have access to the technology that was previously available only to Tier 1 banks.
Peeking under the bonnet
In a CEP platform, there is an engine which has the tools that allow you to model and visualize new strategies as they are running, as well as see any opportunities or threats. On top of this is an adaptive layer, with connectors to convey different formats of events in and out of the processing engine, taking in market data and sending out trades. CEP platforms can work off a simple consolidated feed, but organizations find that it is better to connect to trading venues directly because it reduces the latency and things can be seen as they happen.
What we tend to find is that most customers use FIX to connect to trading venues, so there are hundreds of variants of adapters which talk to different protocols, often over FIX. In the FX world, a trader might connect directly to a bank using their FIX interface; a trader might connect directly to a trading venue, which is often over FIX; of course, they mightalso connect to their own internal systems, databases, middle-ware buses, etc. A trader can plug into whatever source of information they have and even fuse those together. For example, connecting to a news feed and a stock feed, and looking for patterns where the news affects the pattern of the stock prices.
Portable strategies
One of the powers of CEP is to extract away from the specifics of the data sources. For example, a trader might build a strategy that tracks when any news article comes up about any particular stock in their portfolio, followed by a rise or a fall of greater than 5% in the value of that stock within five minutes. This involves temporal, logical, multiple streams, pattern matching and correlation. The trader could then plug into any source of news and any source from a trading venue and that same algorithm would work because the abstraction is dealing with market data, news and order placement and is not hard-wired into one trading venue’s interface.
This helps firms apply algorithms in different trading venues, contexts and geographies, which is why CEP has developed a market so quickly around the world. Traders can take the generic framework and add their own intellectual property into the algorithm, but it is using all those capabilities built up over ten years of development.
Typical use cases
There has been an evolution of the types of user, use case and buyer. CEP started in the world of the broker and the use case then was ‘we want to be able to build new algorithms for the buy-side more quickly and we just cannot keep up’. Within those organizations, different groups including equities, futures options,FX, prime brokerage and proprietary trading adopted it and over time it spread across asset classes. It then developed in the buy-side, particularly in hedge funds. Although hedge funds adopted CEP for their proprietary trading purposes, it has not been adopted by traditional asset managers, who only use it through their brokers.
The use case has also evolved in the last couple of years from trading to real-time risk management and market surveillance. New groups within banks are taking up CEP technology, such as risk, surveillance and compliance departments. The regulators are also adopting this technology as well as the trading venues themselves. It is important for the regulators to move from a world where they have either no visibility or visibility in the rear view mirror. It is important that regulators move to a more proactive, predictive world where they are able to monitor what is going on.
Predatory reputation
All forms of trading are intended to make money, but are these predatory? Certainly, intra-day trading, what might be called high frequency, is aggressive by nature because it moves in and out of patterns quickly, but that can be good for the market. This is the way things are evolving; we cannot turn it off without going back to the Stone Age. On the other hand, if traders are using illegal practices such as quote-stuffing, in which they try to ‘gum up’ the markets on purpose to distract others while they make a profit, is clearly wrong.
But this is where real-time surveillance can help to catch those people.It would be like equipping the regulators for high speed pursuit so they can keep up with the traders’ Ferraris, instead of having them currently riding bicycles. Better monitoring is required, but it is inappropriate to view everybody as predatory. There are a few ‘bad apples’ out there who need to be clamped down on and this is where CEP technology can help. The Commodity Futures Trading Commission is discussing the possibility of inspecting algorithms but it would take huge manpower. Why not have a free market, monitor it closely, discover the problems as they are happening and then crack down on them?
On the Workbench: Further Developing FIX for Equities Allocations
Led by the FPL Americas Buy-side Working Group, Post-Trade Subgroup, the benefits of using FIX for equities allocations is discussed by Greenline’s Dave Tolman, NYSE’s Chris Walsh and Fidessa’s Paul Whenham.
FIX Protocol Ltd. (FPL) launched Buy-Side Working Groups in the Americas, EMEA and Asia Pacific regions in order to provide a platform for buy-side representatives to discuss how their needs can be efficiently met by the automated trading community. The last edition of FIXGlobal focused on the group’s effort to standardize execution venue reporting and this edition will introduce another primary area of focus for the group, which has been to facilitate the expanded use of FIX for post-trade processing. To that end, the Working Group identified the primary business workflows in this area and are developing implementation guidelines for each. It is the belief of the group that industry adoption of these guidelines for implementations of these flows will substantially reduce implementation cost and time for all parties.
The objective of the FPL post-trade processing initiative for equities is to further define a FIX messaging protocol for bilateral post-trade processing between the buy-side and sell-side that can supplement existing post-trade processes and allow firms to better manage post-trade processing risks, further extend the front office success of FIX to post-trade/pre-settlement and avoid/reduce pre-transaction costs.
In post-trade processing, the buy-side allocates the trade among one or more accounts and communicates the allocations and fees to the sell-side. For US equities, the sell-side accepts or rejects the allocation instruction but does not add any additional data. For non-US equities, the sell-side may communicate additional fees back to the buy-side. Once there is agreement between the buy-side and sell-side on the allocation, there is a final account-level trade ‘confirmation’ from the sell-side that must be ‘affirmed’ by the buy-side before the trade information is forwarded to the appropriate Central Clearing Party (CCP) for clearing and settlement.
Currently the most common process is to use an intermediary system to communicate and match allocations optionally followed by a second intermediary system to communicate confirmations, match affirmations, and pass affirmed trades to the CCP.
Who will benefit most from the implementation of FIX allocations?
Both buy-side and sell-side benefit. First, having a bilateral alternative to using a common intermediary system reduces dependence on a single point of failure, thus improving overall availability. In addition, using FIX simplifies the matching and communication process as well as eliminating intermediary transaction costs for those allocations completed over FIX.
How can greater uniformity of allocations messaging be encouraged and how will that improve straight through processing?
There are many parties that must cooperate in the post-trade process – buy-sides, broker/dealers, custodian banks, central clearing – and multiple protocols and communication mechanisms are currently employed as well as considerable human intervention. Utilizing bilateral FIX messaging in itself reduces the complexity of the communication and matching process because the messages flow on the same FIX session as the orders and can be directly linked to the referenced trade executions resulting in many fewer matching issues, faster processing and lower costs. Having a uniform industry standard such as the FIX Protocol will reduce the cost and time for implementation because the many affected parties can reduce the number of protocols and connection types required to support their clients.
How can a smoother allocations post-trade process lower total trading costs?
The immediate opportunities for cost savings are the intermediary transaction charges and the people and time cost of resolving the more complicated intermediary allocation mis-match issues. However, if the industry standard FIX Protocol could be adopted at levels that reached all the way to the central clearing parties, there are significant opportunities for reduction in communication costs from just being able to use FIX-based communication, for which many of the order processing links already exist.
There is also the reduction in complexity from using FIX all the way because transactions, allocations and confirmations can be linked and traced which will result in a reduction in manual intervention to resolve issues. Finally, a common straight-through protocol would also reduce the implementation and support costs of needing different methods of allocation and/or clearing and settlement in different regions of the world.
How are allocations being addressed across other asset classes, e.g. futures, derivatives, fx?
Futures: Version 4.4 of the FIX Protocol, as with all versions of the protocol, was developed in concert with market participants including multiple major broker/dealers and many buy-side firms. It has proven to be extremely successful in reducing post-trade processing time and issues. The ‘rules-of-engagement’ specification is available on the FPL website (www.fixprotocol.org), within the FPL Americas Buy-Side Working Group section and includes futures and options-on-futures as well as single and multi-leg orders. There will be considerable benefit from using this, in terms of reduced costs and time, to any buy-side or sell-side planning to implement futures trading via FIX.
FX:Allocations via FIX for FX is in its early stages. If done via FIX, it most frequently employs pre-trade allocations which is somewhat limiting. The banks and portal vendors are just beginning to, or are in the process of, offering post-trade allocations via FIX. There is no real industry standard at this point.
High Frequency Trading in Brazil: Mirage or Miracle?
Christian Zimmer, Head of Quantitative Trading and Research, and Hellinton Hatsuo Takada, Quantitative Trader, of Itaú Asset Management reveal the truth about high frequency trading in Brazil.
Conference panels, discussions and articles on High Frequency Trading (HFT) generally start with its definition. The term HFT is like ‘Cleopatra’ – sexy and mysterious and everyone is keen to know more about it. But the term HFT speaks for itself, so is it wasting time to go over it again?
Probably, because the term ‘high’ only has meaning relative to an external point of reference, just like cold, hot, sweet or other adjectives. This subjectivity is all the more interesting, as it is extremely difficult to measure an investor’s brief holding period in most financial markets and, therefore, determine if it really is ‘high’. Unlike in the US, where the exchanges do not register the origin of the trade, Brazilian regulation allows BM&FBOVESPA to identify the final client on every trade. Consequently, it is much easier to measure the holding period of an investor for each asset. Also, this rule is the means by which the exchange determines whether an investor’s trade is classified as a ‘day trade’ and is thus eligible for reduced fees.
Naturally, BM&FBOVESPA does not classify a trader opening a position in the morning and closing it at the end of the day as a high frequency trader. There should be far more trading than this to qualify as HFT. But how much more? It depends on the exchange’s criteria and reference point for ‘high’.
Figures for HFT published by BM&FBOVESPA in their April 2011report show 3.9% of the BM&F segment is high frequency and 5.9% of the BOVESPA segment. Consequently, the reduced fees are presented to the Brazilian trading community as less of an issue, as they say there is evidence of HFT taking hold. But HFT volume is not really increasing and is still far off the US figures which are often cited at around 60-70%. After carefully observing BM&FBOVESPA market prices, it is easy to conclude that it would take some time (possibly hours) to have a change in the prices sufficiently large enough to pay the transaction costs.Remember that HFT strategies are very sensitive to transaction costs.
Our suggestion is to step away from making subjective references to ‘high frequency’. Instead, one should look at the underlying trading strategies. The incentives an exchange should create to attract flow must be adjusted to the strategies that are really needed. Each strategy deserves a different set of policies and this will help the diversification of the traders’ strategies.
A trader using a market maker strategy can live with exchange fees as long as the bid-ask spread is sufficiently high. If the spread narrows, the costs become crucial and the exchange must lower the fees in order to keep this client in the market. On the other hand, a directional trader has different issues; if the fees are high, a trader must wait longer for a relevant price move so that they can capitalize on their position. Contrary to the market maker, the directional trader loves to see narrow bid-ask spreads. There would be no need to lower fees when the spread is close. The same is true for the statistical arbitrage traders.
When looking at the third party analyses of HFT in the international markets, we often see that the most common strategy is the market maker approach. This fact is strongly influenced by market fragmentation, which we do not have in Brazil. Fragmentation creates new inter-market trades, which could qualify as arbitrage trades, but not necessarily as market maker trades. Fragmentation also makes exchanges and other venues compete for the customers that provide liquidity and, as a result, give incentives to market makers. As mentioned above, Brazil does not have a fragmented market and BM&FBOVESPA does not see it necessary to ask for more liquidity. At least not as long as international capital flows are strong and increasing. Liquidity is needed in second tier shares and below.
It remains to be seen whether the inventive BM&FBOVESPA program to exempt the officially designated market makers from exchange fees will be enough to stimulate other participants to trade. At least theoretically, this provides an entry/ exit point for statistical arbitrage traders. However, as long as the allowed spreads can be as large as 1%, the strategy might not be necessarily profitable. At this moment it is worth noting that most of the Brazilian statistical arbitrage trades are long-short trades in stocks focusing on preferred-common stock relationships (in Brazil they are known as PNON, with PN standing for preferred stocks and ON for common ones).
It is also interesting to look at statistical arbitrage trades that are latency dependent, i.e. true arbitrage trades. Are these the ‘true’ high frequency traders? If there are only a few trading opportunities per day, it does not seem as if BM&FBOVESPA could classify them as high frequency. Latency sensitive traders typically use what the exchange refers to as the DMA3 (clients directly sending orders through a connection to the exchange) or DMA4 (co-location) categories. Trades through these categories can easily be measured. Unfortunately, the ability to measure the latency sensitive flow is lost because the DMA3 category is also used for any direct sponsored customer trades, so all that remains is to measure the flow from the co-location model.
If we use the DMA4 numbers as the reference point for HFT, then we reach a HFT participation figure of 2.8% in the BM&F segment and about 2% in the BOVESPA segment (as at April 2011). The BM&FBOVESPA DMA4 measurements are significantly lower than their HFT percentages. This suggests they accounted additional strategies into this pool, such as market making strategies. Theoretically market makers could have contributed to this figure, but because of a very narrow spread in the high volume stocks and high fees, it is reasonable to assume that the market making strategy does not contribute too much to the HFT volume.
One might argue that there are still the directional trades. Yet, as this strategy needs a certain price move before it can make money and the number of trades per day is limited. On the other hand, the number of traders that might be using this strategy is not limited, as the models are nearly all different. There are only about ten Brazilian players able to successfully run intra-day directional trades. Perhaps we should conclude that the international players have better models or a better understanding of the market?
Recently, BM&FBOVESPA announced a new pricing model for high-frequency traders, which uses the Average Daily Trading Value (ADTV) to calculate fees in its equity market. Fees range from 0.019% for R$20 million ADTV up to 0.01% for firms trading over R$500 million ADTV. Ironically, almost no firms were able to qualify as ‘high frequency’ players within the exchange’s cost reduction program.
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Open For Discussion: Click here to see what readers had to say about HFT in Brazil and hear the author’s response.
Latency: Why Care?
Citihub’s Paul Chew and Richard Donaldson lay out the latest in Asia Pacific latency reduction and discuss how firms should prioritize their technology investments.
No one in AsiaPac used to care much about latency. However, when the Tokyo Stock Exchange (TSE) launched arrowhead in 2010 reducing their matching engine latency from 1 second to 5 milliseconds (a 200 fold improvement) it created a paradigm shift in the trading landscape by eliminating the exchange as the chief cause of latency and shifting the focus back onto market participants.
What’s more, this was not an isolated event – August 2011 will see the culmination of a US $200m investment by the Singapore Stock Exchange (SGX) to create the world’s fastest matching engine (SGX REACH) with average response times of 90 microseconds. The Australia Stock Exchange (ASX) invested US $35m to drive down their latency from 30 milliseconds to 300 microseconds; at the end of this year the Hong Kong Stock Exchange (HKEx) is expected to launch its new matching engine reducing average order response times from 130 milliseconds to 9 milliseconds (a 15 fold improvement).
At the same time, volumes are rising. TSE’s daily average equity order volume jumped 22% to 8.239 million orders in 2010 after the launch of arrowhead. Even before the proposed latency improvements by HKEx, they recorded a 41% increase in volume during the same period.So how will increased volumes and a reduction in exchange matching latency impact buy/sell-side firms? Surely it’s a benefit to doing business? Actually, with market participants now contributing to the majority of order processing latency, it creates both a challenge and an opportunity.
Increased stress will be placed on market participants’ trading systems because message volumes are growing and the time interval between messages from the exchange is falling. Conversely, market participants that can support growing volumes and drive down their own latency will create a competitive advantage. So what will this really mean for market participants and where should they target their limited investment dollars?
eTrading Platform Maturity
Our industry experience in Asia Pacific across buy/sell-side firms and vendors indicates a broad range of capability and focus. This is evident from contrasting client feedback and has given rise to what we have termed eTrading Platform Maturity:
- Tier One: Platform Stability – “We care about stability, availability and reliability, not latency.”
- Tier Two: Instrumentation – “We care about platform latency but we need to improve the way we measure and analyze it.”
- Tier Three: Platform Optimization – “We don’t care about absolute latency as long as we’re first on the order book.”
Fundamentally, latency is one of the key barometers of system health. Significant increases in measured latency are indicative of a stressed platform which can lead to outages impacting reputation and resulting in lost revenue.
We believe all firms should first establish a reliable platform that copes with daily business demands with predictable and consistent levels of latency before chasing the next tier of eTrading Platform Maturity.
Of course this is all a balancing act, often requiring business and technology teams to prioritize stability over new product development and increased functionality. Smart investment in platform stability can be achieved through simple measurement and analysis of latency to target improvements providing these are supported with the appropriate post-implementation controls.
All Eyes on Asia: the 9th Asia Pacific Trading Summit
The 9th Asia Pacific Trading Summit resembled the trading world it represents: growing, energetic and varied. More than 400 delegates converged on Hong Kong to connect and take in the leading trends in Asia Pac trading. Andy Xie, independent economist, formerly Head of Asia Pacific Economics for Morgan Stanley, gave a riveting presentation on the growth of the Chinese market. Benjamin Pedley of HSBC Private Bank outlined the necessity of navigating a changing risk and policy environment.
Aggregation was argued over during an engaging panel featuring Kent Rossiter, RCM Asia Pacific, and Will Psomadelis, Schroders Investment Management, who also participated in the panel discussion on the benefits of High Frequency Trading (HFT) on liquidity, including John Fildes, GETCO Asia and Matt Saul, FIL Investment Management.
True to the democratic roots of the FIX Protocol, each session featured audience voting on topics including the long term effect of large retail flows on prices (Negative – 36%), the likelihood of a double-dip global recession (Likely – 65%), the importance of unified multiasset class trading platforms (Very Important – 40%), prospects for regulatory arbitrage in Asia (Yes – 71%), the need for regulatory control of HFT (In Favor – 70%) and the most popular TCA metric (VWAP – 55%).
Highlighting the growing awareness of regional competition and updates in technology and strategy, representatives from the Tokyo Stock Exchange, Bombay Stock Exchange, Stock Exchange of Thailand, Australian Securities Exchange, Singapore Exchange and Hong Kong Stock Exchange shared their thoughts on questions such as what makes an exchange competitive and the avenues for pan-region trading venues. Not to be out done, the conference closed with a video recap of the day through the eyes of the ever witty Joel Hurewitz.
For more information about this and other FPL events in the region, visit www.fix-events.com.
A Letter from Japan
Gen Utsumi, a longtime member of the Japanese electronic trading community, talks about how the events of 11 March 2011 may indicate the future direction of electronic trading in Japan.
When I was a teenager, I loved computers. Back then it was really exciting to wait for the release of a new personal computer every year. My first PC was the NEC PC-6001MK2 which was the first Japanese PC with synthetic voice speaking ability – it had 64KB of memory and a cassette tape player. For more than 20 years, the world of computers was a very exciting place. There were always new technologies evolving in the industry and so many talented people shared that excitement.
Now, computers are even more advanced, but people are not as excited as before. The computer industry seems to have matured. Could we say the same for electronic trading?
Nine years ago, when I started to sell FIX engines in Tokyo, ‘STP’, ‘Electronic Trading’ and ‘FIX’ were the buzzwords. Having a FIX interface was an exciting thing and sometimes when an exchange introduced their FIX interface based on real needs, they also used it as a marketing tool. Electronic trading was a frontier of the financial industry and I met a lot of people with ‘frontier spirit’. Once an electronic trading link was established via FIX or other means, new services and strategies started to emerge, such as Proprietary Trading Systems, algorithms, Smart Order Routers (SORs) and dark pools.
These, along with technological advancement, brought a wave of colocation and low-latency products and the race is still going on. Now it seems that having ‘microsecond’ latencies is not surprising anymore. Would latency be exciting again if it were in nanoseconds? My guess is, probably not. While there are still ways to make money in electronic trading, the industry seems to have matured.
Allow me to make another analogy: Japan. Japan has also matured socially and economically. Infrastructure is well established yet Japan’s boom period has long since passed. General sentiment is gloomy due to government resignations, a low birth rate, low economic growth, huge government debt, and reduced trade profits because of global competition.
Then the earthquake hit on 11 March 2011. Surprisingly, people were relatively calm in Tokyo, considering the magnitude of the event. There were many rumors circulating regarding the Fukushima Nuclear Power Plant, but people continued doing business as normally as possible. I will not repeat the grave details here, but I would like to point out that many people are starting to say that this event was a sign of change.
Now three months later, there are signs of recovery here and there. With disaster of this scale, it is obvious that help from the government is not sufficient to respond to the needs of all those people affected. Refugees are being supported by volunteers, families, neighbors and friends. There are over 2,000 refugee camps and some camps are better equipped than others.
One particular refugee camp I know is getting considerable support including food, trucks, bicycles and other living needs as well as comics for the kids – all of which are brought in by supporters. People visit the camp every weekend from Tokyo and the people in the camp welcome those supporters whole-heartedly. There was a strong mutual ‘trust’ established between the people in the camp and their supporters. The camp next to it is not doing so well; they accept donations and goods at the gate, but they do not welcome volunteers and supporters to visit their camp. There was no ‘trust’ here.
Before the earthquake Japan seemed to be heading towards isolation, but after earthquake, the Japanese people are once again beginning to bond and support one another in order to survive. Japan, after the years of stagnancy, may have found a new direction.
Back to electronic trading. We are now electronically and globally connected as you can see from the growth of the FIX Protocol, yet there is uncertainty about exchange mergers, the proliferation of HFT, dark pools, SORs and algorithms. Now what?
No matter how systematically connected you are, how technologically advanced your systems are or how profitable your business is this quarter, in this world of uncertainty, ‘trust’ matters. Since we are electronically connected, we may be at the phase to establish ‘trust’ relationship as individuals. This is a lesson in risk management that the Japanese people are learning the hard way.
日本から一言
３月１１日の大地震が示唆する、日本の電子トレ ーディングの未来についての考察
少年時代の私は、コンピューターが 好きだった。 毎年新しいパソコンが 発表されるたびに、どんな新機能が あるのかわくわくしたものだ。 私の 最初のパソコンは、NEC PC-6001MK2 というパソコンで、日本のパソ コンとして初めて合成音声によるス ピーチ機能がついていた—64kbの メモリとカセットテーププレイヤーが 標準装備だった。 それから２０年以 上、コンピュータの世界はとても刺激 的な世界であり続けた。 次々と新し い発明が、新機能が追加され、新し い仕組みが発表され、たくさんの私 のような人間を魅了し続けた。 コン ピュータの進化は今も続いている・・・しかしすでにそこには驚きはない、 ハードディスクがテラバイトになった と言われても、ふーん、というだけだ。 コンピュータの世界はすでに成熟し てしまったように見える。
同じことが、電子トレーディングの世 界にも言えないだろうか？ ９年前、 私が日本でFIXエンジンというもの を営業しはじめた頃、「STP」、「電子 取引」、「FIX」は業界のキーワードだ った。 FIXインターフェースを持つと いうことは、エキサイティングなこと であり、取引所はFIXインターフェー スの導入を、実際のニーズもベースと なってはいるが、マーケティングの一 環として先進性をアピールするとい う意味もこめて、導入した。 電子トレ ーディングは業界のフロンティアで あり、私はこの９年間で様々なフロン ティア・スピリットを持った人達と出 会う機会に恵まれた。 電子トレーデ ィングのリンクがFIXなどを通して確 立されると、PTSやアルゴリズム、ス マートオーダールーティングやダー クプールなど新しいサービスやスト ラテジーが生まれ、そして技術革新 にともなってコロケーションや低レイ テンシーの製品が登場し、そしてレー スは続いている・・・。 すでにマイクロ 秒のレイテンシーは、驚きではなくな っている。 では、レイテンシーがナノ 秒レベルになったら、驚きがあるのだ ろうか？ おそらくは驚きはないだろ う。 もちろん、電子トレーディングに より利益を生み出す機会はまだまだ あるが、すでに電子トレーディングと いう世界自体は成熟しているように 見える。
成熟という観点からさらにひとつの 例として、日本という国がある。 日本 はすでに社会的にも経済的にも成熟 した国だ。 高度なインフラが設立さ れ、確立されている国ではあるが、高 度成長期はとうの昔に過ぎている。 国としては、停滞感が漂っている— 次々と変わる首相、出生率の低下、経 済の低成長、巨大な国の債務、世界 的な競争の中における貿易黒字の減 少、凶悪犯罪の増加、など、数えればきりがない。
そして、今年の３月１１日、大地震が 日本を襲った。 事態の重大さに反し て、東京では人々は意外なほど冷静 だった。 福島原子力発電所に関す る、様々なニュースや憶測が飛び交う 中、人々はなるべく通常通り仕事をし ていた。 私は、ここで地震がどのよう な深刻な被害を日本に与えたかとい うことを、再度論じるつもりはない。 私が、言いたいのは、多くの人々が、 この大地震を変化 の兆しとみている ということだ。
この記事の執筆時点で、すでに２か 月以上がたち、復興の兆しはあちら こちらにある。 この規模の災害にお いては、当然政府や国、自治体といっ た、公的機関による支援だけでは被 災された人々への支援としては不十 分だ。 被災した人達の生活は、ボラ ンティア、家族、近隣の人々、友人な ど多くの人達によって支えられている。 全国には２０００以上の避難所 があり、それぞれの避難所における 物資の状況などは様々だ。 私が知っ ている、とある避難所は、かなり恵ま れている—食べ物、トラック、自転車、 など様々な生活必需品がボランティ アの人達によって提供され、最近で は子供たちが読む漫画本までどんど ん送られている。 毎週継続的に、こ の避難所を支援するグループが訪 れ、様々な必需品を提供する―そし て避難所の人達は物資の欠乏した なか、精一杯の感謝をこめて、もてな してくれる。 避難所の人達と支援者 達は、強い信頼の絆で結ばれている。 一方この避難所の隣の避難所は、そ れほど物資には恵まれていない状況 にある。 この避難所の人々は、寄付 や物資を避難所のゲートで受け取 るが、決してボランティアや支援者を 避難所の中には招き入れない。 ここ では“信頼”がない。 地震が起きるま で、日本はどんどん個人主義、孤立主 義に向かっていた。 ところが、地震の 後、日本の人々は生き残るために、再 びつながり、お互いを支え合う方向 に向かい始めた。 成熟しきった日本 という国が、新しい方向に動き出した ように見える。
電子トレーディングに話を戻そう。 FIXプロトコルの普及でもわかるよう に、すでに業界はグローバル規模で 電子的につながっている。 しかし、取 引所の合併、高頻度取引（HFT）、ダ ークプール、SOR、アルゴ取引の先に 何があるのか、その未来はとても不 明瞭だ。 その次のステップは何だろ う？ どれだけシステム的につながっ ていても、どれだけ技術的に優れたシ ステムを持っていても、どれだけこの 四半期に利益を上げていても、この 不確実な世界において、今求められ ているのは、”信頼“なのではないだろ うか？ システムがつながった今だか らこそ、今まで以上に人と人が会社 と会社が”信頼“の絆を確立していく ことが必要なのではないだろうか？ 日本の人々は、大地震という厳しい 教訓からそれを学びつつある。
FPL News June 2011
By Daniella Baker
Helping the Industry To Trade More Effectively in 2011 and Beyond
What a year it has been so far! We may only be 6 months into 2011, but FPL has achieved a significant amount already. With new industry initiatives being implemented and many additional projects well underway, the organisation’s success, as witnessed by industry participants in multiple markets globally, is not showing any signs of slowing down.
The number of firms joining FPL continues to rise – we started the year with just over 250 members and this number recently increased just over 10% to more than 275. This growth is great for the organisation and FPL’s work is shaping the future of our markets. New members provide fresh perspectives and an expanse of knowledge and expertise. The FPL leadership works hard to meet and exceed the expectations of its membership and this article will highlight work that has been conducted since January to support this effort and the new initiatives currently being implemented to continue this in the coming 6 months:
Understanding Buy-Side Needs
As the financial markets continue to evolve, the requirements of the buy-side trader are changing. To enable FPL to develop a stronger understanding of the needs of this industry sector, in 2010 buy-side focused working groups were created in both the Americas and European regions, complementing the existing group in Asia Pacific. In February 2011, in an effort to achieve a more consistent response from the broker-dealer community, regarding broker reporting of the execution venue on each fill, FPL published a best practices document to help resolve these challenges. To view this document, please visit www.fixprotocol.org. These groups will continue to provide support to this industry sector in the coming 6 months.
From a European perspective, in spring we were also pleased to welcome the UK based Investment Management Association (IMA) to the FPL membership. We look forward to the association’s participation in the many active FPL committees and working groups addressing real business issues impacting the buyside community, ensuring that the needs and views of its membership are effectively represented and addressed.
Raising Awareness of Risk Management
In late 2010, FPL launched a Risk Management Committee to raise awareness regarding the implications of electronic trading on risk management and to develop standardised best practices for the industry. In January, this group released an initial set of guidelines which recommend risk management best practices in electronic trading for institutional market participants.
The objective of the guidelines is to provide information around risk management and encourage firms to incorporate best practices in support of their electronic trading platforms. In today’s volatile marketplace, the automation of complex electronic trading strategies increasingly demands a rational set of pre-trade, intra-day and pattern risk controls to protect the interests of the buy-side client, the sell-side broker and the integrity of the market. The objective of applying electronic order risk controls is to prevent situations where a client, the broker and/or the market can be adversely impacted by flawed electronic orders. To view the guidelines please visit www.fixprotocol.org.
From a European perspective, in April the EMEA Business Practices Subcommittee commenced an initiative to develop a better understanding of the risk management issues raised by regulatorydevelopments that will impact the region, to ensure that localised issues are being effectively addressed. We hope to hear more about how this work progresses over coming months.
Meeting Business Challenges Inter-Party Latency
Addressing the business challenges impacting member firms throughthe development of standards is central to the organisation’s goals. A primary example of how this is being achieved is the work being conducted by the FIX Inter-party Latency (FIXIPL) Working Group. Currently, many firms make various claims regarding latency, but there is a lack of standards or consistency behind what they are measuring. This group is developing a new standard that will provide a bench-mark, so that the latency of a trade as it moves through different systems at exchanges, trading venues and investment banks can be compared on an equal basis.
Over recent months, testing of the new standard has been conducted in three independent real-world environments by separate FPL member firms. This initial round of testing revealed the potential for additional functionality to be added to further support business needs. Additional testing is now underway to review these enhancements to ensure that the standard meets market requirements as effectively as possible when it is released in Quarter 4 of this year.
High Frequency Trading
FPL has identified that many firms currently use costly proprietary protocols to achieve the highest levels of performance. To help the industry reduce cost, FPL has started work to develop a new standard for electronic trading, which can be optimised to support very high frequency trading. To achieve this goal, a High Performance Interfaces Working Group has been formed. Following the production of project scope documentation, this group is currently focused on defining the project’s detailed requirements before starting to create the specification and proceed into independent testing phases, which are expected to commence in coming months. The group is working to make the standard available for market adoption in early 2012.
Additional Support for Exchanges and the Fixed Income and Derivative Markets
Over the past 6 months, the FPL Global Technical Committee (GTC) has also released new functionality to enhance the core FIX specification that is now available for market adoption. By working closely with exchanges in Asia and the U.S., further support has been added to enable equity and derivative exchanges to implement FIX in as standard a manner as possible.
From a fixed income perspective, new functionality has also been added to support the proposed requirements of the new U.S. three-way trade confirmation and settlement time processes as recommended by the Federal Reserve Bank of New York (FRBNY) Tri-Party Repo Reform Task Force. This group was created to identify and address the weaknesses in the U.S. tri repo market that became evident during the recent financial crisis.
Over coming months, the GTC is expected to release further FIX functionality which will include support for the futures markets to enable firms executing trades in line with give-up agreements to communicate the end-to-end execution source information, from execution through to clearing and settlement via FIX. Additionally, further functionally for exchanges is also due for release shortly.
New and Emerging Markets
In 2011, FPL has continued to work closely with market participants in multiple new and emerging markets globally to support growing interest in using the FIX Protocol to facilitate evolving electronic trading requirements. A primary example of this is the FPL India Working Group that was formed earlier this year and held its inaugural meeting in May. This group seeks to provide a forum to support the growth of electronic trading practices and FIX adoption in the region and the initial key areas of focus include addressing local implementation issues, understanding the challenges and opportunities prevalent within India and identifying the educational needs of the market, so FPL can gain a stronger comprehension about how it can more effectively support the local market. Additionally, in late 2010 FPL also launched a Middle East Working Group to help the organisation gain a stronger understanding of
the needs of this region and plans to continue work with this group over upcoming months.
Promotion of the Standard
Promoting increased use and adoption of the FIX Protocol is key to the standard’s future success. To support this effort, in March FPL released FIXwiki, a FIX-specific wiki website that provides a comprehensive and authoritative view of the FIX specification. This interactive and educational web tool enables visitors to benefit from the knowledge that has been kindly contributed by other users, so they can enhance their usage and understanding of the protocol. FPL Member firm representatives are encouraged to actively contribute additional information to FIXwiki by providing comments and sharing knowledge and insight that will be used to support the future development of the protocol. FIXwiki can also be viewed by the broader FIX user community, providing a valuable reference tool for all market participants.
Central to FPL’s strategy of promoting increased adoption of the standard, is the various events it organises in markets across the globe. FPL’s 2011 events commenced in January with the Dubai based Middle East Briefing, which was the first event ever held by FPL in the region and attracted a strong local audience keen to learn more about the benefits of FIX and how advancements in electronic trading are expected to impact market practices.
This was then followed by the EMEA Trading Conference in March, which attracting more than 900 delegates, proved to be the largest event ever organised by FPL and additional events were also held in Mumbai, Frankfurt, Hong Kong, New York, Boston, Tokyo, Sao Paulo and Toronto. In the latter half of the year, we look forward to events scheduled to take place in Mexico City, Singapore, Sydney, London, New York, Moscow, Stockholm, Tokyo and Chicago. If you would like to learn more about the events FPL will be hosting in 2011 please visit www.fixprotocol.org/events.
Within the first half of this year, FPL also participated in a carefully selected range of externally organised events, to benefit from the opportunity to explain the advantages of using standards to key industry segments. This included exhibiting at the 36th annual IOSCO conference, held in Cape Town. IOSCO is the international standard’s setter for global securities regulation and its conference attracts representatives from regulatory organisations around the world. By participating in this event, FPL was able to further communicate how regulators can utilise the protocol in the development of future regulation, allowing firms to leverage their existing investment across additional business areas, generating significant cost and resource savings.
These are just some of the many initiatives currently underway by FPL, all ultimately focused on supporting the evolving business needs of the trading community to enable firms to optimise efficiencies and reduce cost. Participation in these initiatives is open to FPL Member firms and we encourage their involvement, for more information please contact the FPL Program Office by email at FPL@fixprotocol.org. If your firm is not a member of FPL, but would be interested in finding out more about how to join please contact Bernie Simon, FPL Membership Relations Manager by email at Bernie.Simon@fixprotocol.org.
