World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and...

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orld Federation of Exchanges | Cambridge, MA | Nov, 2 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

Transcript of World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and...

Page 1: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

World Federation of Exchanges | Cambridge, MA | Nov, 2009

High Frequency Trading

Tools and Technologies

Presented by

Larry Tabb (Founder & CEO)

Page 2: 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

Page 3: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 4: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 5: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 6: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 7: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 8: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 9: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 10: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 11: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 12: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 13: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

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

Page 14: World Federation of Exchanges | Cambridge, MA | Nov, 2009 High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)

World Federation of Exchanges | Cambridge, MA | Nov, 2009

High Frequency Trading

The Tools and Technologies

Presented by

Larry Tabb (Founder & CEO)