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SEC begins overhaul of US equity markets with ban on DMA, investigate ATS, Dark Pools and HTF’s

The US Securities and Exchange Commission has proposed new rules prohibiting broker-dealers from providing customers with unfiltered or naked access to an exchange or ATS. The watchdog has also called for comment on issues relating to high-frequency trading, co-locating trading terminals and dark pool trading as it seeks to re-write the rule-book for a new era of computer-driven trading.


Approximately 38% of the daily volume in US equity markets is traded by firms accessing trading venues via sponsored or direct market access arrangements through their broker-dealers.

The SEC’s proposed rule would require brokers to put in place risk management controls that would help prevent erroneous orders, ensure compliance with regulatory requirements, and enforce pre-set credit or capital thresholds.

“Unfiltered access is similar to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied,” says SEC chairman Mary Schapiro. “Today’s proposal would require that if a broker-dealer is going to loan his keys, he must not only remain in the car, but he must also see to it that the person driving observes the rules before the car is ever put into drive.”

The rule change comes amid a broad review of rapidly-changing US equity market structures by the SEC which is under pressure from Washington to protect the interests of long-term investors and preserve the market’s primary function as a mechanism for capital formation.

With this in mind, the watchdog has issued a “concept release” seeking public comment on issues relating to high frequency trading, co-location, and dark pool trading.

The release asks a series of specific questions about the current market structure, including:

Market quality metrics

  • What are the best metrics for assessing market quality for long-term investors and have these metrics improved or worsened in recent years?

Fairness of market structure

  • Is the current highly automated, high-speed market structure fundamentally fair for investors?

High frequency trading

  • What types of strategies are used by the proprietary trading firms loosely referred to as high frequency traders, and are these strategies beneficial or harmful for other investors?
  • Is the overall use of any harmful strategies by proprietary firms sufficiently widespread that the Commission should consider a regulatory initiative in this area?

Co-location

  • Do co-location services (which enable exchange customers to potentially route trades faster by placing their computer servers in close proximity to an exchange’s computer system) give proprietary trading firms an unfair advantage?
  • If so, should the proprietary firms that use these services be subject to any specific trading obligations?

Dark liquidity

  • Has the trading volume of undisplayed trading centers (such as dark pools) reached a sufficiently significant level that it has detracted from the quality of public price discovery?
  • If more individual investor orders were routed to public markets, would it promote quote competition in the public markets, lead to narrower spreads, and ultimately improve order execution quality for individual investors beyond current levels?
  • Are a significant number of individual investor orders executed in dark pools and, if so, what is the execution quality for these orders?

Source: Finextra, 14.10.2010

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Filed under: Exchanges, News, Risk Management, Trading Technology, , , , , , , , ,

Dark Pools: HKEx chairman slams dark pools

Ronald Arculli joins the ranks of those criticising alternative trading platforms for creating an unfair playing field.

Much has been said and written in recent months about dark pools, and on Wednesday the chairman of Hong Kong Exchanges and Clearing threw his hat into the ring. Not surprisingly, Ronald Arculli is not in favour of such trading platforms, which only require prices to be published after a transaction is complete.

He set out his stall in a speech at the Foreign Correspondents’ Club in Hong Kong titled ‘Roles and Challenges of Stock Exchanges’. Highlighting the benefits of exchanges (good risk management, transparency, liquidity fairness, a reliable infrastructure and central counterparty services, among other things), he said they demonstrated their worth during the crisis: “Almost all exchanges continued to function normally and remained open during the turmoil.”

Arculli also remarked that governments worldwide have recognised the “unique value” of exchanges, with a number of moves afoot to standardise over-the-counter contracts and move them onto exchanges. This is in stark contrast to well publicised concerns of regulators, such as the US Securities and Exchange Commission, as to whether dark pools create unfair advantages for some in the market. Arculli believes they do and clearly outlined his concerns.

Firstly, these platforms lack transparency, as they show buy and sell orders and deals that are not transparent or available to the general investing public, he argued, effectively creating a two-tiered market. They are typically run by broker-dealers and large market-makers looking to save on transaction costs and fees, and do not alert the broader market of impending deals which could affect a stock’s equilibrium.

Powerful technology can be used to conduct high-frequency algorithmic trading in dark pools through both on- and off-exchange platforms to profit or arbitrage on small price differences, said Arculli. This has resulted in dark pools accounting for 12% of market trades in the US now, up from 1.5% just five years ago, while in Europe they account for some 4% of equity trades. In Asia, these venues make up a much smaller percentage of the average daily turnover, he added, but in a globalised marketplace, they still raise significant concerns.

Besides transparency, another issue is that the proliferation of alternative platforms means liquidity is increasingly fragmented, diverting volumes away from publicly traded exchanges, he said. Smaller companies may suffer as high-frequency traders tend to prefer larger, more liquid shares. Such fragmentation not only affects effective price discovery, said Arculli, but also increases price volatility and adds to surveillance difficulties.

Moreover, the lack of regulation and transparency of dark pools could result in notable systemic risk, he said, citing the problems surrounding Lehman Brothers and AIG last year. “As dark pools typically lack a central counterparty, the default of a large participant could have severe consequences on market stability,” he said.

In addition, these platforms raise concerns over company ownership. “Arguably when shares are held only for fractions of a second, it is no longer about participating in the ownership of a company or ensuring it is well run,” he said. “The opaqueness of trading, and its fragmentation have negative implications for effective corporate governance.”

Arculli suggests the rise of such platforms set up by investment banks might indicate a trend towards the re-mutualisation of stock trading. Originally stock exchanges tended to be set up as associations by their trading members, he said, but have since de-mutualised and become commercial, often listed, corporate entities to better serve their stakeholders.

“Now as the bigger trading participants are getting together again to create their own networks, is the trend reversing?” said Arculli. “Complicating matters even further, some exchanges have decided to join the fray and team up with large institutions to set up their own dark pools.” Singapore Exchange’s recent tie-up with Chi-X is one such example. Other trading platform providers, such as Liquidnet, are also working on expanding into Asia.

Arculli went on to say that regulators in the EU and the US have been reviewing dark pools and considering stricter measures to ensure a fair and stable trading environment. Investors — especially institutional ones — are seeking better, faster and cheaper services for more computerised methods of trading. Hence, he added, exchanges must continue to offer better execution and more efficient pre- and post-trade services to stay competitive, while protecting investors.

Despite his worries, Arculli, said, competition is welcome. China, for example, has the capacity and the need for more than one successful financial centre. But he added a caveat.

“We welcome challenges that strengthen our markets and make them more effective and efficient,” said Arculli. “But we are concerned by those that increase systemic risk or disadvantage a certain segment of investors to the benefit of others.”

Source: AsianInvestor.net, 11.12.2009

Filed under: China, Exchanges, Hong Kong, News, Risk Management, Singapore, Trading Technology, , , , , , , , , , , , , , , , , ,

Asian dark pool BlocSec removes minimum order size requirement

BlocSec, the first Asian dark pool to cater to the buy-side and the sell-side, owned by CLSA Asia-Pacific Markets (‘CLSA’), will remove the current minimum US$250k or 20% of the 30-day Average Daily Volume (‘ADV’) order size requirement 1.

Removal of such minimum order size requirement will enable smaller size orders to flow into the system, increasing both liquidity and matching. BlocSec clients can continue to submit and trade large size block orders in BlocSec simply by specifying the minimum quantity fill for their executions.

Christian Chan, Director of Electronic Execution Sales, CLSA said: “We continue to improve and respond to client needs and have removed our minimum order size to source and deepen our liquidity pool, so as to provide greater flexibility across the platform and markets in which we operate.”

BlocSec has been designed to ensure complete anonymity for buyers and sellers. Order entry and matching occurs without the risk of giving away client name, side, position or price of an order which means zero information leakage.

“In addition, we have added the ability for our Client Relationship Managers to accept manual orders and route any balances to the CLSA trading desk if instructed to do so. Again, ensuring more flexibility for clients and a smooth and seamless trade flow process,” Chan added.

Since its launch in May 2008, BlocSec has become the preeminent Asian liquidity aggregator and electronic crossing network for Hong Kong, Japan, Singapore and Australian equities with an average daily liquidity flow over US$77m and an average cross size of US$1.04m.

BlocSec provides traders the ability to place orders with complete anonymity and zero information leakage into the market. BlocSec continues to gather momentum and build liquidity in over 800 distinct names with 50% of all clients entering orders securing a match.

As a CLSA group company, BlocSec has a substantial community of institutional investors with the ability to provide a deep pool of liquidity. Liquidity is also maximized as BlocSec is open to both buy and sell side clients.

Source: FINEXTRA 17.11.2009

Filed under: Asia, Australia, Exchanges, Hong Kong, Japan, News, Singapore, Trading Technology, , , , , , , , , , , , ,

SEC sets sights on sponsored access and exchange co-location

After taking on dark pools and flash orders, the Securities and Exchange Commission has now turned its attention to high frequency trading and the practice of sponsored access to exchanges.

In a speech at the Sifma annual conference, SEC chairman Mary Schapiro told delegates that the regulator is drafting a proposal on sponsored access, focussing on arrangements that enable unfiltered access by non-regulated entities – in many cases, high frequency traders – to exchange systems.

“I liken it to giving your car keys to a friend who doesn’t have a license and letting him drive unaccompanied,” says Schapiro.

She argues that broker-dealers act as gatekeepers, maintaining the integrity of markets and that this should not be sacrificed “to give a trader a millisecond advantage”.

Schapiro has also asked SEC staff to find ways to shed light on high frequency traders, who now account for more than 50% of volume.

“I believe we need a deeper understanding of the strategies and activities of high frequency traders and the potential impact on our markets and investors of so many transactions occurring so quickly. And we need to consider whether there are additional legislative authorities needed to address new types of market professionals whose activities may not be sufficiently regulated,” she says.

In addition, the watchdog expects to seek public comment on co-location – the process where exchanges allow some broker-dealers to place their servers close to the matching engine of the bourse. Shapiro is worried that this offers “significant advantages” for traders who rely on speed.

The SEC has already proposed a ban on flash trading – which gives some investors a sneak peak at open order before the wider market – and last week made three specific proposals aimed at strengthening the regulation of dark pools.

Meanwhile, with the use of dark pools and high frequency trading under intense scrutiny, Goldman Sachs – which runs the Sigma-X platform – has been defending the practices to the SEC.

In a recent memo to the watchdog, the investment bank says dark pools “are a technological evolution of classic market structure that have brought benefits to institutional and retail trading alike”.

Source: Finextra, 27.10.2009

Filed under: Exchanges, Market Data, Risk Management, Trading Technology, , , , , , , , , ,

SEC proposes dark pool rules; institutions divided over merits of high frequency trading

The US Securities and Exchange Commission has unveiled proposals aimed at shedding more light on dark pool trading by introducing new rules that would require enhanced public disclosure of stocks passing over alternative trading networks.

At an open meeting in Washington, the Commission is presenting three specific measures aimed at strengthening the regulation of dark pools and increasing market transparency.

The first proposal would require actionable indications of interest (IOIs) to be treated like other quotes and subject to the same disclosure rules. The SEC is also proposing to lower the trading volume threshold applicable for displaying best-priced orders in a particular stock from the current five per cent level to 0.25%. A third proposal on the table would amend existing rules to require real-time disclosure of the identity of the dark pool that executed the trade.

Introducing the proposals, SEC chairman Mary Schapiro says: “Although dark liquidity always has existed in one form or another in the equity markets, the Commission must assure that the public markets and non-public trading venues operate within a balanced regulatory framework.”

The SEC has already said that it intends to ban flash trading – which gives some investors a sneak peak at open order before the wider market – and undertake a review of high frequency trading practices, including co0location and direct market access.

The latest move comes as Greenwich Associates releases research which implies that institutional investors are deeply divided over the merits or otherwise of high frequency trading strategies. Much of the support for further regulation is centred around the use of flash orders and indications of interest that are widely seen as elements of front-running.

However, interviews with 78 institutional investors in Canada, the US and Europe found that even some of the most active institutional stock traders cannot agree about whether high-frequency trading helps or hurts institutions, retail investors and the companies with publicly trading stock.

Forty-five percent of participating institutions think high-frequency trading poses a threat to the current market structure, while 36% believe it actually benefits the market and investors by increasing overall liquidity. However, almost 20% of institutions say they do not know enough about high-frequency trading to make a judgment about its overall impact on the market, much less on specific stock prices.

“Institutions are even split about whether high-frequency trading helps or hurts their own trading operations and outcomes,” says Greenwich principal Jay Bennett.

Until these questions are answered, regulators should limit any new rules to narrow trading practices that have an obvious and proven negative impact on investors, he says.

“More specifically, we would urge the SEC to commission an academic study on the short-term and mid-term effects of high-frequency trading on a company’s stock: opinion is evenly divided as to prospective benefits vs. negatives, with fully half of institutional investors claiming uncertainty.”

Source: Finextra, 21.10.2009

Filed under: Exchanges, News, Risk Management, Trading Technology, , , , , ,

SEC to extend dark pool probe

The Securities and Exchange Commission is to extend its regulatory probing of dark pools to include issues surrounding high frequency trading, direct market access and co-location.

Speaking at a securities conference in Basel, Switzerland, SEC chairman Mary Schapiro reiterated regulatory worries over the expansion of dark pool trading and its impact on transparency and market fragmentation.

“As dark pools divert an increasing volume of order flow away from the public quoting markets, the potential for market fragmentation is a concern,” she said. “Also, where there is less publicly-available information about the trading practices of significant markets, there may be more opportunities for information to be leaked only to favored market participants. For these reasons, the SEC is considering whether dark pools need more light.”

The SEC has already proposed a ban on flash order types, where users are given an advanced peek at unfilled orders ahead of the wider market.

The regulator is now widening its probe to cover other recent advances in automated trading, said Schapiro.

“We have recently begun an in-depth review of multiple market structure issues given the rapid advancements in technology,” she told the conference. “In addition to our recent actions with regard to flash orders and our current focus on dark pools, we will also examine high frequency trading, direct market access and co-location.”

Schapiro’s remarks came as Thomson Reuters released the results of a poll of 100 buy and sell-side participants on the impact of high-frequency quantitative trading.

While 70% of respondents felt that high frequency trading strategies made execution easier and brought additional liquidity, 63% agreed that the tactic could potentially pose a risk to the market.

Ninety-six per cent of the audience felt that regulators are not fully up to speed regarding the implications of high frequency trading.

Similar sentiments have been expressed this week by the World Federation of Exchanges, which has called for co-ordinated action by regulators to reign in the spread of dark pools.

Speaking at a WFE conference in Vancouver, Federation chairman William Brodsky, said: “We’ve allowed the technology and the evolution of these markets to run way ahead of the regulators’ ability to understand them.”

Source: Finextra, 09.10.2009

Filed under: Exchanges, News, Risk Management, Trading Technology, , , , , , , , , ,

Dark Pools in Danger ?

Increasing regulatory supervision and calls for transparency on one side and  the threaten proliferation of “unregulated and opaque”  Dark Pool and crossing networks by large institutions, have increased the calls by exchanges and exchange federations to review regulation and even ban them.

While the global debate is in full swing, China has clearly distance it self from any alternative trading venues in the country and prohibited the access to any “non-transparent” trading venues like dark pools for it’s QDII (Qualified Domestic Institutional Investors).

Below Article highlight the current trends and voices

SEC to extend probe into dark pools 09.10.2009

The Securities and Exchange Commission is to extend its regulatory probing of dark pools to include issues surrounding high frequency trading, direct market access and co-location.

What’s the Matter with Dark Pools, 02.10.2009

Dark pools are on the regulatory front burner. They’re seen as competing with the displayed markets, even as they’ve captured a segment of trading from the desks of broker-dealers’ upstairs.

The Securities and Exchange Commission is now bearing down on issues related to trading in dark pools and how much flow can execute in individual pools without triggering obligations to the rest of the marketplace. To provide some perspective on this broader discussion….

LSE and Turquoise an Item: Official, 01.10.2009

When we suggested here a few weeks back that the London Stock Exchange take a look at on-the-block Turquoise as a possible solution to its ‘TradElect problem’ it was slightly tongue in cheek. After all, we knew the LSE was in talks with MillenniumIT and it looked on paper as if an approach to Turquoise would amount to the exchange losing face to an upstart rival.

Dark Pools 2009: Not So Dark Anymore AITE Group, 30.09.2009

Only two things about dark pools are clear at this time: their overall market share continues to grow, and regulatory intervention appears inevitable.

London Stock Exchange to leave FESE  30.09.2009

But the move is a sign that a recent criticism by some of the world’s largest exchanges of the large banks’ off-exchange activities is not shared by some exchanges, which see their interests increasingly aligned with those same banks.

n a letter to Eddy Wymeersch, chairman of the Committee of European Securities Regulators, Ms Hardt said FESE believed the banks’ dark pools were “unregulated venues” operating with “full opacity”. The European equities market was “becoming a dealer market”.

Chi-X Global alleges ‘fear card’ move by ASX 30.09.2009

The head of Chi-X Global, the equities trading platform, on Wednesday accused the Australian Securities Ex­change of playing the “fear card” after the exchange’s chairman spoke of the dangers of allowing multiple share trading venues.

New ideas fail to lift mood over dark pools 24.09.2009

Yet even as dark pools continue to generate eye-catching ideas, controversy is raging over their very existence. In Europe, the issue is pitting exchanges against big banks in a new battle over control of billions of dollars in share trading orders.

Exchanges call on G20 to tackle dark pools 23.09.2009

The World Federation of Exchanges (WFE) has urged G20 leaders to press for market reform to tackle the uneven playing field and eroded price discovery it claims has been caused by the emergence of alternative trading platforms such as dark pools.

In a letter sent to Mario Draghi, head of the financial stability board at the Bank for International Settlements ahead of the G20 summit in Pittsburgh, the WFE calls for more uniform rules between exchange-traded and “less-regulated” markets.

The WFE warns: “The heightened opacity of certain market operations in many countries inhibits price discovery and may lead to negative outcomes, such as increased volatility.”

“Taken together, the combination of the absence of a level playing field between execution venues and decreased market transparency is an unsettling development,” says the letter, signed by William Brodsky, chairman of the WFE.

The exchanges call on G20 leaders to agree on ways to avoid “regulatory arbitrage” to ensure market participants do not just go to countries with weak rules.

Source: Finetik, 01.10.2009

Filed under: Australia, Exchanges, FiNETIK Articles, Japan, News, Risk Management, Trading Technology, , , , , , , , , , , , , , , ,

TABB Group insight into High-Frequency Trading

TABB Group outlines a few principles to which it adheres when discussing the controversial subject of high-frequency trading.

The current discourse on high-frequency trading is often challenged by a distortion of definitions. Journalists, politicians and industry analysts bend or stretch definitions to meet their various (and often conflicting) objectives. For example, flash orders and high-frequency trading have been improperly used as equivalent terms. Front-running has been invoked when “liquidity detection” would be more accurate. While there is room for a legitimate debate over the scope, size and impact of high-frequency trading, the industry must first agree to terms. Below, TABB Group outlines a few principles to which it adheres when discussing this controversial subject:

HFT refers to fully automated trading strategies (in equities, derivatives or currencies) that seek to benefit from market liquidity imbalances or other short-term pricing inefficiencies. These opportunities could last from milliseconds to minutes and possibly hours. While these strategies can be employed overnight, the majority of HFT strategies attempt to be market-neutral or closed out by the end of each day.

The kinds of strategies that fall under HFT include electronic market making, liquidity detection, cross-asset arbitrage, short-term statistical arbitrage and volatility arbitrage. The most prevalent equity HFT strategy is electronic market making, in which firms attempt to profit from intraday imbalances in the supply and demand for liquidity. Not all market making is high-frequency (though almost all of it is), and not all high-frequency trading is market making, but market-making strategies profit by intelligently managing the risk caused by inconsistencies between buyers and sellers.

Perhaps the most controversial and least understood aspect of high-frequency trading falls under the category of liquidity detection. While classic market makers attempt to capture spread by aggressively quoting at the bid and the ask of a number of stocks, a liquidity detector uses techniques to sniff out large orders of blocks being sliced and diced (usually by an algorithm) that a high-frequency trader believes it can outsmart.

Who Does It?

Although HFT makes up a large portion of total trading activity, a relatively small number of firms are responsible for its volume. Three types of firms build their strategies around HFT: proprietary trading firms (virtual market makers), the largest hedge funds and investment banks’ proprietary trading desks. While each of these institutions has a unique position in the industry, their common ground is their mandate to achieve uncorrelated and high returns.

Approximately one-half of liquidity provisioning these days comes from traditional market makers or large broker-dealers. The remainder originates from low-profile (though this is now changing) high-frequency trading firms — the proprietary (prop) trading shops — that few other than the industry intimates have ever heard of. Prop shops have been around for many years, earning their profits by risking their own capital. They originated either from groups formerly within broker-dealers or independent firms that have the knowledge, skills and technology to fully automate the trading process; or from screen-based day-trading shops that began automating their strategies in the late 1990s/early 2000s. These prop shops virtually automated the market-making function by leveraging inexpensive computing cycles, low-latency infrastructures and fully automated trading strategies.

Asset Classes Traded by HFT Proprietary Shops

Most HFT prop shops choose to keep their identities and intentions secretive, operating under the radar in the hope of improving their chance to profit. Through a thorough examination of Web sites and other public information, TABB Group has found that while the vast majority of these firms trade U.S. equities, the firms are quick to apply their strategies to the entire array of asset classes (see chart).

Investment banks have always traded for their own accounts. Their prop desks typically operate from a distinct legal entity — separate from the entity that handles customer orders — within the investment bank; the bank risks its own capital by deploying trading strategies designed to maximize profit. Two divisions within investment banks that deploy HFT are automated market making and proprietary desks. Market makers are registered with the SEC, using traditional trading strategies to facilitate liquidity in the market. Prop desks implement a variety of arbitrage strategies, some of which are high-frequency (though certainly not exclusively high-frequency).

For the most part, high-frequency hedge funds engage in short-term trading opportunities rather than bona fide liquidity-based strategies. While the umbrella term statistical arbitrage is frequently applied to strategies with extremely high volumes, there is plenty of ambiguity in this term. It is also true that the majority of funds engaged in statistical arbitrage are not high-frequency by today’s standards. However, over the past 18 months the line between high-turnover strategies and HFT has blurred as hedge funds shorten their time horizons in the face of unexpected market events.

As a result, transaction costs are becoming even more paramount to this sophisticated community. The rationale is that as time horizons shorten, capacity constraints increase and transaction costs become a bigger piece of the pie. High-frequency hedge funds may be layering these liquidity strategies on top of their other strategies so that transaction costs are additive rather than negative.

How Big Is It?

The only art more forgivable than economic forecasting is estimating the market size of an industry that will never reveal its true number. Nonetheless, TABB Group estimates that high-frequency trading accounts for 61 percent of U.S. equity share volume (remember to double-count average daily shares!) and generates $8 billion per year in trading profits.

The methodology begins with an analysis of institutional equity trading volume that we have been collecting since 2006 from 115 U.S.-based equity head traders, including equity assets under management, average daily volume and the percentage of shares executed in blocks. We extrapolate that data to the broader institutional landscape. Retail trade numbers and data from the government are used to determine retail flow. Data from NYSE and Nasdaq and historical market making volumes enhances our picture of current electronic market-making volumes. Last but not least, we discussed our methodology and trading profit calculations (.0024/share) with several HFT hedge funds, independent high-frequency traders and registered market makers.

Is It Good for the Market?

This is the wrong question. The right questions are whether the current market structure can be improved, and what the role of HFT should be in any revised market structure. But that is a scary question because outside of consulting (ahem), IT and perhaps the end investors, there is little for the industry to gain out of major changes to market structure.

The market structure changes and technological advances over the last decade that have made it possible for virtual market makers to supplant the traditional players are viewed as primarily positive for the market. Very few participants or observers suggest that we should roll back the clock on decimalization and exchange competition. Participants feel today’s market structure is orderly despite its complexity, and that it does a very good job of encouraging price discovery (see chart).

How Well Does Market Structure Support the Following Characteristics?

High-frequency equity trading is the lovechild between 12 years of SEC rulemaking and advances in trading technology. The combination of these two trends has been necessary and sufficient to unleash an array of new trading strategies. The continued success of these strategies has exchanges and ECNs, brokers and clearinghouses, and market data providers and technology vendors launching new business models and offerings to support high-frequency traders or to help others adapt to this new environment. Imagining a U.S. equity market structure without high-frequency traders is like trying to remove the c from E=mc2.

Adam Sussman is director of research for TABB Group. Previously he served as a senior product manager at Ameritrade, where he was responsible for order management systems, routing and next-generation trading tools focused on the equities and options markets.

Source: Advance Trading, 07.10.2009

Filed under: Exchanges, News, Trading Technology, , , , , , , , , , , , , ,

ATS Alternative Trading System Guide September 2009

A-Teams ALTERNATIVE TRADING SYSTEM directory covers alternative trading venues for listed securities: equities, futures and options, and their associated, listed financial instruments in the US and Europe.

For a free download go to  A-TEAM Alternative_Trading_Systems_Directory 09.2009

The A-Team Alternative Trading Systems Directory gives perspective to today’s confusing global trading platform landscape, with descriptive information for a comprehensive list of alternative venues. Electronic trading platforms offering alternative liquidity venues from the world’s primary exchanges has expanded significantly in just the past year.

This has been particularly true in Europe, where the EUs Markets in Financial Instruments Directive (MiFID) has spawned a host of Multilateral Trading Facilities (MTFs) and encouraged the proliferation of both independent and broker-sponsored dark liquidity venues, or dark pools. In short, the ATS landscape has become more complex than ever. The Alternative Trading Systems Directory sheds light on the activities of ATSs worldwide and helps clear up the confusion.

Source: A-TEAM, 28.09.2009

Filed under: Exchanges, Library, News, Trading Technology, , , , , , , ,

Chi-X Global alleges ‘fear card’ move of ASX (Dark Pool)

The head of Chi-X Global, the equities trading platform, on Wednesday accused the Australian Securities Ex­change of playing the “fear card” after the exchange’s chairman spoke of the dangers of allowing multiple share trading venues.

The development is a sign of frustration over the absence of government approval of licences that would allow rivals to challenge the country’s incumbent exchange.

At the same time, regulatory scrutiny in the US and Europe of certain off-exchange venues has emboldened exchanges such as the ASX to become more vocal in criticising alter­native trading platforms.

Tony Mackay, Chi-X Global chairman, hit out at the “extraordinary” comments made by ASX chairman David Gonski, who told shareholders at an annual meeting that Canberra should carefully consider whether to allow new entrants into the country’s markets. He claimed that it was unclear how multiple market operators benefited investors. He said Mr Gonski was playing the “fear card” that competition was bad for Australia.

Chi-X Global, controlled by Nomura of Japan, has been in talks with Canberra for more than a year about securing a market licence to offer equities trading. Its sister company, Chi-X Eur­ope, already operates a pan-European equities platform.

Mr Mackay added: “The … ASX operates a regulated monopoly. It has an average operating margin of about 80 per cent when the average for the companies quoted on its exchange is about 25 per cent.”

He said the average cost of executing a trade in Australia was close to five times higher than in Europe and North America.

“They are fighting to keep their monopoly,” he said, adding that the ASX should discuss with government, regulators and new market entrants Australia’s role as a leading securities market in the region.

Source: FT, 30.09.2009

FT.com

Filed under: Asia, Australia, Exchanges, News, Services, Trading Technology, , , , , ,

London Stock Exchange to leave FESE. Dark Pool disputes?

The London Stock Exchange plans to withdraw from the Federation of European Exchanges (FESE), dealing a blow to the trade association for the region’s established bourses as its steps up its lobbying efforts on issues such as “dark pools”.

John Wallace, LSE spokesman, told FT Trading Room: “We are reviewing a number of our memberships across the organisation. We have decided to leave FESE and will seek to work more directly with regulators, legislators and the markets we serve across Europe.”

Mr Rolet sent a letter to FESE secretary general Judith Hardt with the LSE’s decision on Tuesday. Ms Hardt said: “It came as a surprise. There was no reason given and we would of course want to talk before taking any steps. We will definitely try and see what we can do to keep them on board.”

The LSE declined to say why it had decided to leave the organisation, which was founded in 1974 and has over 43 members, including Deutsche Börse, Euronext and the London Metal Exchange.

But the move is a sign that a recent criticism by some of the world’s largest exchanges of the large banks’ off-exchange activities is not shared by some exchanges, which see their interests increasingly aligned with those same banks.

It is also a sign that medium-sized exchanges like the LSE can not afford to antagonise their biggest customers – the banks – at a time when they need their co-operation on key new initiatives, such as clearing.

Xavier Rolet, a former Lehman Brothers and Goldman Sachs trading expert, has spent time since he took over in May repairing damaged relations with the LSE’s 15 biggest customers, mostly banks.

He has redesigned the LSE’s dark pool, Baikal, as a joint venture with the banks. Under his predecessor, Dame Clara Furse, the project was designed as a way of accessing directly the asset and investment manager clients of the banks, bypassing the banks.

Last week, FESE launched an attack  on the proliferation in Europe of dark pools run by banks. FESE did not name any banks but such facilities are operated by most big banks, including Goldman Sachs, Credit Suisse and JPMorgan.

It said such venues, also known as “crossing networks” are not properly registered under rules laid out by the Markets in Financial Instruments Directive (Mifid). Mifid launched competition in European share trading in 2007, leading to an explosion of new type of trading venues.

In a letter to Eddy Wymeersch, chairman of the Committee of European Securities Regulators, Ms Hardt said FESE believed the banks’ dark pools were “unregulated venues” operating with “full opacity”. The European equities market was “becoming a dealer market”.

The LSE is engaged in a cost-cutting drive. Annual membership of FESE costs €180,000. The UK exchange remains a member of the World Federation of Exchanges.

Source: FT, 30.09.2009

FT.com

Filed under: Exchanges, News, Services, , , , , , ,

HKEx to list flexible options, says chairman Arculli

Ronald Arculli says Hong Kong Exchanges and Clearing intends to introduce listed options that allow some degree of tailoring.

As efforts in the US seek to move derivatives trading from over-the-counter markets onto exchanges, Hong Kong is also looking at ways to improve transparency and reduce counterparty risk.

Hong Kong Exchanges and Clearing (HKEx) intends to introduce listed equity options with flexible payment structures by the end of the year, said HKEx chairman Ronald Arculli last week at a conference on market infrastructure organised by Citi.

Arculli cites US efforts to standardise credit-default swap contracts and enable them to be centrally cleared as a reason for Asian exchanges to host more transactions that are currently done OTC.

The exchange is having a pretty good year. Investor risk appetite has returned, helping boost daily average turnover from $6.4 billion at the start of 2009 to $9 billion as of the end of August. Hong Kong has become the most lucrative venue worldwide for IPO and post-IPO fundraising, and the Hang Seng Index is up 40% year-to-date, making the listed HKEx the third-largest exchange in the world by market capitalisation.

The main goals are to streamline the process for attracting H-share listings, particularly in the mining and resource sector; facilitate mainland China’s qualified domestic institutional investor (QDII) programme by hosting mainland exchange brokers in Hong Kong; and list more exchange-traded funds, including possibly ones covering Greater China markets.

What he didn’t mention in his speech, however, was an effort to reduce trading spreads, which remains a priority for many fund managers.

The exchange is closely monitoring what happens in other markets and is well aware of how competition in the US and elsewhere is changing the landscape. Arculli notes that the American regulation NMS (for ‘national market system’ plan), requiring all stocks to trade at the best price regardless of venue, has seen NYSE’s market share in total equity turnover fall from 78% in 2004 to 28% last year.

The same proliferation of alternative trading venues will not occur in Asia, due both to tighter regulation and the vertical silo model of integrated trading, clearing and settlement that is typical throughout the region.

But Arculli says tie-ups — such as Bursa Malaysia’s deal with the Chicago Mercantile Exchange to list palm oil contracts or Singapore Exchange’s decision to form a JV dark pool with Chi-X Global — are changing the playing field. He adds that Australia’s recent decision to shift supervision of market participants from its stock exchange to its securities regulator is the first step to allowing rival exchanges to set up shop there. “This may have implications for Asia,” Arculli says.

He is aware that institutional investors want better services from exchanges for computerised trading, which has led to new methods such as dark pools, high-frequency or flash trading, and co-location of trading servers physically near to the exchange.

However, such developments raise questions that exchange officials and regulators need to consider, Arculli warns. These uncertainties include whether such trading methods create asymmetric information, a risk due to opacity, heightened volatility or other unfair advantages.

Arculli says exchanges provide unique advantages, by helping companies raise capital via listings, which create liquidity and boost market depth. Exchanges also mitigate counterparty risk by providing central clearing and a single location for access to information on market participants’ potential liabilities.

Alternative venues, he suggests, are opaque and tend to fragment liquidity. Arculli acknowledges market demand for best execution and pre- and post-trade services, but he wants to see them done on the exchange. For buy-side traders hoping to see Hong Kong open to direct competition to drive down costs, Arculli offers no sign that he would support such a move.

Source:AsianInvestor.com, 25.09.2009

Filed under: China, Exchanges, Hong Kong, News, , , , ,

Exchanges in a Race to Zero Latency

Nasdaq OMX Group said earlier this month that upgrades to its technology have made it the fastest exchange in the world. That may or may not be true but regardless, the exchange operator’s announcement highlights a drive this year by market centers to reduce the latency of their systems.

Behind the trend is the desire to appeal to such latency-sensitive traders as direct market access and algorithmic players. These folks which include high-frequency traders, bulge bracket prop desks and the electronic trading departments of large broker-dealers want their orders processed as quickly as possible.

“If we’re not building a low latency competitive exchange, we’re just not going to be in the game,” Brian Hyndman, senior vice president for transaction services at Nasdaq, said at last week’s Aite Group conference on high-frequency trading.

Nasdaq reported on September 9 that upgrades to its INET platform and other parts of the technology that underlie five of its trading venues have given Nasdaq an average latency of less than 250 microseconds. That’s faster than BATS Exchange, which pioneered low latency trading. BATS announced in June it executes 80 percent of its orders in under 400 microseconds.

The upshot, according to Hyndman, is that latency has gone down, throughput has gone up and order acknowledgement times are more consistent. “We eliminated the outliers,” Hyndman said. “That’s very important to a lot of Nasdaq’s customers.”

This means, Hyndman explains, that a trader won’t get an order acknowledgement in 250 microseconds on one trade and three milliseconds another time. “There will be no big spikes in standard deviation,” the executive said.

(One millisecond equals one thousandth of a second. One microsecond equals one millionth of a second.)

Besides the changes to INET, whose main feature is the order-matching engine, Nasdaq also upgraded its network to 40 gigabits per second from a 10-gigabit connection; upgraded its hardware; and made a variety of other changes.

Nasdaq’s announcement was just the latest. Ever since June, all five of the major U.S. trading venues as well as one in Canada have put out notices describing the steps they have taken to cut their processing times.

On the same day Nasdaq made its announcement, Chi-X Canada ATS, owned by Instinet, claimed it was the fastest market center in Canada.

The ECN said it boosted its capacity to be able to handle 175,000 messages per second, a 500 percent increase from previous capacity of 30,000 messages per second. Chi-X Canada has benchmarked its average response time for marketable immediate-or-cancel orders at about 350 microseconds. That’s at least 10 times faster than any other major Canadian market center, it contends. Previously, Chi-X Canada’s internal latency was pegged at 890 milliseconds.

“We need to keep up with our customers,” Tal Cohen, Chi-X Canada’s chief executive, said. “The drive for latency is not slowing down anytime soon.”

Chi-X Canada, based on the same technology as Chi-X Europe, launched in February 2008. Cohen said part of Chi-X’s strategy to drive latency lower is to run the system on “commodity” hardware. That way, the ATS can simply plug in the newer and faster boxes once they become available.

Both BATS and NYSE Arca also announced latency reductions this summer. BATS cut its average latency, or the amount of time it takes to execute an order, by 50 microseconds to 395 milliseconds. It also announced that it can now convert an order into a quote for transmission on its market data feed in 631 microseconds.

NYSE Arca, a unit of NYSE Euronext, announced that its order acknowledgement time, the time it takes to confirm receipt of an order, had been reduced to under one millisecond for Tape A and Tape B names and under 650 microseconds for Tape C issues.

Perhaps the summer’s most symbolic announcement came from NYSE Arca’s sister exchange. The New York Stock Exchange said in July it scrapped its 33-year-old SuperDOT platform order delivery and processing system, as well as an internal routing system called Post Support System. In its place, the NYSE installed its Super Display Book system, technology based on NYSE Arca’s trading engine.

The move cut the time it takes to execute an order from 105 milliseconds to five milliseconds, according to the exchange. That’s down from 350 milliseconds in 2007. NYSE customers now get order and cancellation acknowledgements in two milliseconds, the NYSE added.

Five milliseconds is a far cry from Nasdaq’s 250 microseconds, and NYSE executives acknowledge they still have work to do. Still, the rollout this summer of the Super Display Book system was the culmination of an 18-month project that saw the Big Board completely reengineer its underlying hardware and software architecture using technology it acquired with the purchases of Euronext, Wombat Financial Software and Archipelago. The NYSE completely replaced its order entry, order database and routing systems, market data systems and pieces of its post-trade system.

The move to revamp its dated infrastructure potentially opens doors that were previously shut to the NYSE. At least one bulge shop refused to send any of its algorithmic flow to the NYSE because it was too slow, an NYSE exec told Traders Magazine.

On the other side of the Hudson River in Jersey City, N.J., technicians at DirectEdge ECN have also been ripping out old and installing new technology.

DirectEdge has seen its share of trading volume shoot from about 5 percent a year ago to about 12 percent today. To deal with the increase in messages flowing through its systems and prepare for the future, the ECN chose to replace its messaging middleware, TIBCO. It chose faster technology from 29West, a relative newcomer to the business. DirectEdge says installation of 29West’s technology has produced a “dramatic reduction in overall system latency” and increased its throughput.

“It allows us to use persistent messaging without the penalty,” said Steve Bonanno, DirectEdge’s chief technology officer. Persistent messaging is typically slower than non-persistent messaging, but offers guaranteed delivery. No messages are lost as they can be with non-persistent messaging. 29West’s technology eliminates that latency “penalty,” Bonanno explained.

DirectEdge is now able to guarantee its customers an order response time of 300 to 500 microseconds. That’s measured from the time the order enters DirectEdge’s gateway to the time the acknowledgment hits the gateway. Previously, response times of DirectEdge’s three trading platforms were in the 1.2- to 1.5-millisecond range.
Although DirectEdge needed the changeover to 29West primarily for throughput, it couldn’t ignore latency. “Speed is the toll you have to pay to be in this business,” Bonanno said. “Being fast is a given. That has to be there.”

All things are relative, of course, and speed is no different. Market centers are forever engaged in a ferocious battle with each other to win market share. In their desire to impress traders, they will often put out overly rosy latency numbers, critics charge. “There is a lot of confusion, and, in some cases, obfuscation about the actual latency at the venues,” said Donal Byrne, chief executive of Corvil, a Dublin, Ireland-based maker of latency monitoring and management tools. “It is impossible to make apples-to-apples comparisons.”

That applies to both the speed at which the venues disseminate market data as well as the speed at which they convert orders into trades, Byrne added. The problem is that the venues typically offer up an average number, which may be of little use. “If you measure it at one time, you get one number,” Byrne said. “If you measure it a few seconds later, you get another.” He believes trading venues should publish a schedule of numbers for all times during the trading day.

Doug Kittelsen, chief technology officer of execution management vendor FTEN, is also concerned. He believes exchanges should quote their latency data in the 95th percentile, or at the slow end of the spectrum, rather than the median or average, which is standard. “You want to see what the curve is like all the way through to the end,” Kittelsen said, “not just the middle.”

Source: Traders Magazin: 25.09.2009

Filed under: Data Management, Exchanges, Market Data, News, Trading Technology, , , , , , , , , ,

Dark Pools:New ideas fail to lift mood over dark pools

This week, Liquidnet, a US operator of “dark pools”, unveiled the latest device to emerge in European share trading, which it called “Supernatural”.

The company claims it will help European fund managers increase their chances of finding matches for large blocks of shares in Liquidnet’s dark pool by linking it up with other exchanges, brokers and alternative trading platforms such as Chi-X Europe.

Yet even as dark pools continue to generate eye-catching ideas, controversy is raging over their very existence. In Europe, the issue is pitting exchanges against big banks in a new battle over control of billions of dollars in share trading orders.

Dark pools allow the matching of large blocks of shares without prices being revealed until after trades are completed. Regulators on both sides of the Atlantic are studying them amid questions over their transparency.

Dark pools are not only run by companies such as Liquidnet; they are also operated by banks’ trading arms and exchanges. They have grown rapidly since first appearing in the US in the late 1990s, with at least 15 in existence in Europe.

The exchanges have launched an attack on the proliferation in Europe of pools run by the banks – such as Goldman Sachs, Credit Suiss, and Morgan Stanly – arguing they are operating outside the view of European regulators. 

Mifid launched competition in European share trading in 2007, leading to an explosion of new type of trading venues.

The Federation of European Securities Exchanges, whose members include Deutsche Börse  and Euronext , wrote this week to the Committee of European Securities Regulators in Paris, claiming banks’ dark pools were “unregulated venues” operating with “full opacity”.

It said that under Mifid, crossing networks were supposed to register under certain formal categories that would subject them to the same market surveillance and price reporting requirements as exchanges.

Yet many were not, FESE claims. “Practically all of this trading is outside the realm of European rules and thus beyond the reach of supervisors,” wrote Judith Hardt, FESE secretary general, in the letter to CESR chairman Eddy Wymeersch, a copy of which was obtained by the Financial Times. “As a result, more trades are being executed away from the public view, without interacting with other orders, and at prices that may not be optimal for clients.”

She argued that European equity markets “are becoming a dealer market”.

The banks are furious. They see the FESE move as exchanges exploiting post-crisis concerns over off-exchange markets to persuade policymakers of the benefits of channelling trading of stocks through regulated exchanges.

Dark pool trading accounts for about 4 per cent of all trading in Europe, according to consultancy Tabb Group. But it is growing, and with the proliferation of the types of “dark” trading venue unleashed by Mifid, bankers say exchanges fear trading could shift further away from them. “The exchanges are opportunistic, fear-mongering. And it’s pretty clear why: commercial interest,” says one.

The banks reject the notion that their crossing networks are unregulated, pointing out that broker-dealers are already regulated, and the banks’ clients – such as money managers – are regulated.

They also argue that their dark pools perform a legitimate function at a time when large orders are increasingly hard to execute on exchanges as complex electronic trading strategies slice orders into smaller and smaller sizes.

They reject the FESE view that investors are at a disadvantage by the alleged “opacity” of bank dark pools. They say that many of the block trades being carried out in them are placed by the banks’ asset manager clients, which in turn are handling funds placed with them by millions of ordinary investors.

The problem, industry experts say, lies with Mifid itself. Exchanges say that bank dark pools are not required to report trades in a coherent way, or even at the same time as those trades reported to the market by exchanges. Mifid is unclear on the issue.

Steve Grob, director of strategy at Fidessa, a trading technology company, says: “The reporting environment in the US is much more transparent. There needs to be some clear regulation about how they report what they do.”

Niki Beattie, managing director of The Market Structure Practice, a consultancy, says: “The thing is that brokers are governed by a certain set of rules and exchanges are governed by another. Mifid failed to move with the times.”

She believes, however, that Mifid has given brokers an “unfair advantage” over exchanges. “They are both trying to be liquidity pools and [Mifid] has given the brokers an unfair advantage,” says Ms Beattie, a former trading strategist at Merrill Lynch.

CESR is studying the issue. Last week Charlie McCreevy, European Union internal markets commissioner, said dark pools would form part of the European Commission’s planned review of Mifid. That would focus on whether the growth of those operated by broker-dealers gives their backers “unfair commercial advantages” in the market.

With dark pools under attack more broadly, banks may have a tough job making their case. Ms Beattie says: “The exchanges probably have some right to be out there questioning this.”

Source: FT, 24.09.2009 by Jermy Grant

Filed under: Exchanges, News, Risk Management, Trading Technology, , , , , , , , , , , , ,

Darkpools: Joint Study Tackles Dark Aggregators dangers

Tools that help traders reach many dark pools at once can be a detriment to best execution, according to a recent study.

Using “dark pool aggregators” can actually work against you. In fact, they can increase your chances of incurring adverse selection on a trade, where the trade is about to move against you or already has. The institutional electronic brokerage Pipeline Trading Systems and the buyside firm AllianceBernstein reached these conclusions recently after conducting a study on the subject. It’s entitled: Adverse Selection vs. Opportunistic Savings in Dark Aggregators.

Adverse selection means selecting the wrong counterparty. Market makers prefer to deal with “uninformed” traders, such as retail customers. They don’t want to buy stocks from “informed” traders, such as sophisticated day traders or hedge funds, who know everything about where a stock is going. For example, a dealer does not want to pay $40 per share to accommodate a well-informed seller for fear that the stock will then drop to $30.

Download:Darkpools_Adverse Selection vs Opportunitistic Savings in Dark Aggregators

Brokerages have been building algos that access multiple dark pools over the past couple of years as solutions to market fragmentation that so many of the pools have helped create. Different aggregators would let traders access an ever increasing number of pools at once.

And as dark pool volume climbs, aggregator use becomes more significant. Average daily volume traded in dark pools stands at roughly 8 to 10 percent of the overall market, according to many estimates. But as a percent of the total market volume, participation rates in the dark aggregators–where one trades consistently using them–commonly range between 15 and 25 percent, depending on the aggregator, according to Henri Waelbroeck, vice president and director of research at Pipeline.

More than dark pool volume trends, problems of adverse selection can develop from the company you keep. As traders get more of their volume done in dark pools that provide small fills, they interact more frequently with high-frequency trading firms, Waelbroeck said. Trouble arises when high-frequency traders–which represent around 70 percent of overall volume today–use their short-term alpha models to trade at advantageous prices, he added.

“So, as you interact with these guys, if you don’t have any kind of control for participations rates [in aggregators], you’re exposing yourself to the natural adverse selection,” Waelbroeck said, “in that, when you are putting out buy orders, then they tend to execute faster as the stock is about to go down, and more slowly as the stock is about to go up.”

But the study also reported that it’s possible to both measure and mitigate the severity of adverse selection incurred from using dark pool aggregators. And it said there are tactics traders can apply to use aggregators and reduce adverse selection costs, Waelbroeck said.

“What we really showed in this paper is that you can develop a methodology to measure adverse selection costs, and also measure the opportunistic savings that can be achieved by using dark aggregators,” Waelbroeck said. “By measuring these separately, you can identify opportunities for reducing adverse selection costs, selectively, without having to reduce opportunistic savings.”

One buyside trader who uses algorithms that access multiple dark pools agreed with the study’s assessment of the risks associated with dark pool aggregators. Whenever his firm uses the aggregators, it watches for any kind of signaling risk.

“In other words, we don’t want to send [an order] to an aggregator, find that we receive a couple of executions, and see adverse market reaction because we’ve essentially signaled a particular buyer,” he said. “We probe around in them, depending on how effective they seem to work for the particular orders we’re handling.”

Any risk of adverse selection through using aggregators often depends on the liquidity of the stock in the order, he said. A trade of a stock that trades easily won’t likely run into trouble in an aggregator. With less liquid names, though, the risk of signaling your intentions to others increases, he said. This working knowledge informs how he uses aggregators.

“We may just place an order in there, wait a minute or two and withdraw it,” he said. “When you leave resting orders in those situations, I think they’re discover-able, given enough time.”

Pipeline said in the study it has a solution to the adverse selection problem. The firm built an algorithm switching engine that can be used to shift in and out of “opportunistic strategies” at different times throughout the trade.

Based on the Pipeline/AllianceBernstein study findings, the study recommended the following actions to avoid adverse selection:

  • Avoid using passive strategies or manually managing tactical limits early in the trade, especially in high volatility markets when trading non-discretionary orders.
  • Use dark aggregators tactically with limited exposure times.
  • When using opportunistic algorithms or trading tools, it is important to control the participation rate. Ideally this can achieved preemptively through predictive analytics, but ex-post control measures–like imposing minimum and maximum participation rates–already lead to significant improvements.
  • Exploit the alpha gleaned from the participation rate anomaly. On a rise in the dark fill rate, consider pulling back to passive strategies; when dark aggregators run dry consider engaging in the displayed markets to keep to a reasonable schedule.
  • Use opportunistic algorithms or dark aggregators in situations with low adverse information risk.

Source: Tradersmagazine.com, 21.08.2009 by James Ramage

Filed under: Data Management, News, Risk Management, Trading Technology, , ,