World Federation of Exchanges | Cambridge, MA | Nov, 2009
High Frequency Trading
Tools and Technologies
Presented by
Larry Tabb (Founder & CEO)
Agenda
To the winners go the spoils Buy-side needs multiple tools Tools
Dark pools Flash Sponsored access
Technologies
Immediacy
Size
Low Impact (size)
1) Blocks/Dark pools2) Dark Algorithms
Quiet Accumulation
1) Dark / Opportunistic Algorithms
2) Blocks/Dark pools3) Broker Capital
Delegation
1) VWAP/Implementation Shortfall Algorithms
2) Direct Market Access
Need it, want it, got to have it
1) Direct Market Access2) Accumulation Algorithms3) Broker Capital
Different trades need different tools
Source: TABB Group
No. of Dark Venues
Source: TABB Group Estimate
18 27 32 45 52 533 4 9 21 29 36
1.5%
4%
7%7.
5%
12.5
%
1%2% 2%
3%
5%
10%
11.5
%
2005 2006 2007 2008 2009 2010
US Europe
% Traded Volume(dark)
Dark pools are steadily gaining market share in both the US and Europe
1 of 9
NationalExchangeBroker
Buy-side/Investors/Liquidity takers
Brokers, Buy-side, Prop, and OtherBidders for Liquidity
When trading at the exchange, you are competing against the marketplace
Source: TABB Group
Broker
NationalExchange
Broker Brokers, Buy-side, Prop, and OtherBidders for Liquidity
BrokerDarkPool
1 of 91 of 1
In a dark pool, you get first look, and generally better than market pricing
Buy-side/Investors/Liquidity takers
Source: TABB Group
HFT Tools
Co-lo Being first is everything
Low latency connectivity Fiber and networking
Market Data infrastructure Direct feeds
CEP Models Execution engine Risk modeling
Exchange w/Best Price
Exchange w/oBest Price Market Maker
Liquidity Provider
Market Maker Liquidity Provider
Sell
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
RetailInvestor
Retail Broker
SellNot best bid
Best bid
Will match or better bid?
Yes / Trade
No / No Trade
FreeExecution
25 to 30cents/100Shares
Problem is if MM/LP executes against the better price and/or changes quote
Flash orders – a second chance to match orders before they are routed
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
Firms are developing technology to mange this
Equal access 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
Investor BrokerMatching
Venue
Order Order
Execution Execution
Traditional Access
Market MakerLiquidity Provider
Broker
Matching Venue
Order
Execution
Execution
Sponsored Access
While all orders need to be represented by a broker they don’t need to go through brokers pipes
Investor
Broker
ExchangeOrders
Traditional Access Benefit
Unique Liquidity from Other Customers
Investor
Investor
Investor
ECNs
DarkPool
First Second
Market MakerLiquidity Provider
Broker
Matching Venue
Order
Execution
Execution
Sponsored Access Benefit
Speed to External Matching Venues
Sponsored access benefit is exchange execution speed which does not necessarily mean access to best orders
Sponsored Access Challenges
Broker
Market MakerLiquidity Provider
Matching Venue
Co-lo Facility
Investor
DarkPool
Broker Data Center
Matching Venue
Fast
Not as fast
Sponsored Access Challenge
While access to co-loed matching engine is quick, significant volume (and better liquidity) comes through brokers (institutional and retail orders).
Traditional Access Benefit
Unique Liquidity Comes from Customers Order FlowInvestor
Exchange
Orders
Investor
Investor
Investor
ECNs
Broker
DarkPool
SecondFirst
Traditional (Better)Liquidity hits Brokers First
The majority of orders come through brokersfirst. As such they firstmatch in broker crossing networks &dealers’ dark pools – unless prop shops also co-lo or have high speed access to dealer dark pools
Dark pools generally get access to best order flow – which is hard for sponsored access firms to get access to
The amount of data that needs to be processed is astronomical
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
August 13, 2009
World Federation of Exchanges | Cambridge, MA | Nov, 2009
High Frequency Trading
The Tools and Technologies
Presented by
Larry Tabb (Founder & CEO)
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