Transcript Larry Tabb - World Federation of Exchanges

High Frequency Trading
Tools and Technologies
Presented by
Larry Tabb (Founder & CEO)
World Federation of Exchanges
|
Cambridge, MA
|
Nov, 2009
Agenda
 To
the winners go the spoils
 Buy-side needs multiple tools
 Tools
 Dark
pools
 Flash
 Sponsored access
 Technologies
Different trades need different tools
Size
Low Impact (size)
Quiet Accumulation
1) Blocks/Dark pools
2) Dark Algorithms
1) Dark / Opportunistic
Algorithms
2) Blocks/Dark pools
3) Broker Capital
Delegation
Need it, want it, got to
have it
1) VWAP/Implementation
Shortfall Algorithms
2) Direct Market Access
1) Direct Market Access
2) Accumulation Algorithms
3) Broker Capital
Source: TABB Group
Immediacy
Dark pools are steadily gaining market share in
both the US and Europe
% Traded
Volume
(dark)
18
3
2005
27
4
2006
32
9
2007
US
Source: TABB Group Estimate
45 21
52 29
53 36
2008
2009
2010
Europe
No. of
Dark
Venues
When trading at the exchange, you are
competing against the marketplace
Brokers, Buy-side, Prop, and Other
Bidders for Liquidity
Buy-side/
Investors/
Liquidity takers
Broker
National
Exchange
1 of 9
Source: TABB Group
In a dark pool, you get first look, and
generally better than market pricing
Broker
Buy-side/
Investors/
Liquidity takers
Brokers, Buy-side, Prop, and Other
Bidders for Liquidity
National
Exchange
Broker
Broker
Dark
Pool
Source: TABB Group
1 of 1
1 of 9
HFT Tools
 Co-lo
 Being
 Low
first is everything
latency connectivity
 Fiber
and networking
 Market
 Direct
Data infrastructure
feeds
 CEP
 Models
 Execution
engine
 Risk modeling
Flash orders – a second chance to match
orders before they are routed
Retail
Investor
Sell
Retail
Broker
Not best bid
Exchange w/o
Will match or better bid?
Best Price
Market Maker
Free
25 to
Liquidity Provider
Execution Yes /
30cents/100
Trade
Shares
Market Maker
Best bid
Liquidity Provider
No /
Exchange w/
No Trade
Best Price
Sell
Problem is if MM/LP
executes against the better
price and/or changes quote
Retail Order Execution Using Flash Order
1)
Retail order comes into broker
2)
Broker routes order to ECN/Exchange using “Flash Order”
3)
If ECN/Exchange does not have the best price it either needs to match the best price or send to the Exchange/ECN displaying the best price (Reg NMS) –
maximum time .5 seconds
4)
Since the ECN/ Exchange doesn’t have best price it flashes order to market markers/liquidity providers (typical time .02 to .05 seconds)
5)
If MM/LP wants the order it either needs to match or better bid
6)
If not – order must be routed to exchange showing best price
7)
Typical flash order is free – typical charge to route order to another ECN/Exchange is 25 to 30 cents per 100 shares
8)
The challenge with this order is that the market maker / liquidity provider gets to see this order up to .5 seconds before it is routed to the exchange with
the best price
9)
This is enough time for the market maker / liquidity provider to either change their quote or take out the lower price, change quote and execute the order
at the higher quote – locking in a profit
Sponsored access provides thin gateway
veneer between client and exchange

Sponsored access allows brokers & other trading firms to
trade directly on an exchange using the access broker’s
credentials


Mostly for liquidity providers / high frequency traders
Issues are

Risk management – order goes to the exchange before broker sees it

If they fat finger an order or the trading model goes errant then the broker
is on the hook


Equal access


Firms are developing technology to mange this
Easier to co-lo / obtain sponsored access than ever before
Better understanding of liquidity in exchanges vs. dark pools
Exchanges have open access – dark pools don’t
 Brokers & dark pools usually get order flow before exchanges
 Dark pool order flow is more protected than exchange liquidity



Otherwise execution quality would be worse, and
Institutional investors would shun dark pools like the plague
While all orders need to be represented by a broker they
don’t need to go through brokers pipes
Traditional Access
Order
Investor
Order
Matching
Venue
Broker
Execution
Execution
Sponsored Access
Market Maker
Liquidity Provider
Order
Matching
Venue
Execution
Broker
Execution
Sponsored access benefit is exchange execution speed
which does not necessarily mean access to best orders
Sponsored Access Benefit
Speed to External Matching Venues
Order
Market Maker
Liquidity Provider
Matching
Venue
Execution
Execution
Broker
Traditional Access Benefit
Unique Liquidity from Other Customers
Investor
Orders
Exchange
Investor
Broker
Investor
Investor
ECNs
First
Second
Dark
Pool
Dark pools generally get access to best order flow –
which is hard for sponsored access firms to get access to
Traditional Access Benefit
Traditional (Better)
Liquidity hits Brokers
First
Unique Liquidity Comes from Customers Order Flow
Investor
Exchange
Investor
Broker
Investor
Orders
ECNs
First
Investor
Second
Dark
Pool
Sponsored Access Challenges
Co-lo Facility
Market Maker Fast
Liquidity Provider
Investor
Broker Data Center
Not as fast
Broker
Dark
Pool
Matching
Venue
Matching
Venue
The majority of orders
come through brokers
first. As such they first
match in broker
crossing networks &
dealers’ dark pools –
unless prop shops also
co-lo or have high
speed access to dealer
dark pools
Sponsored Access
Challenge
While access to
co-loed matching
engine is quick,
significant volume
(and better liquidity)
comes through
brokers (institutional
and retail orders).
The amount of data that needs to be processed
is astronomical
August 13, 2009
PITCH, ITC 2.1, DirectEdgeX, TotalView-ITCH 4.0,UQDF, UTDF, ArcaBook for Equities, CQS, CTS, OPRA, Canadian
Venture Exchange Level 1, Toronto Level 1, NASDAQ Index Dissemination Service, NASDAQ Trade Data Dissemination Service,
NYSE OpenBook --- Source: Exegy – marketdatapeaks.com
High Frequency Trading
The Tools and Technologies
Presented by
Larry Tabb (Founder & CEO)
World Federation of Exchanges
|
Cambridge, MA
|
Nov, 2009