Raymond Russell, of the FIX Inter-Party Latency (FIXIPL) Working Group and Corvil lays out the use cases for the FIX Inter-Party Latency standard and the functionality of Version 1.0.
Goals for FIXIPL
The principal goal of the Inter-Party Latency Working Group is to ensure interoperability between different latency monitoring vendors. Interoperability is essential because latency monitoring is vital to running a low-latency service, therefore the people building systems need confidence that they can start with one vendor and still migrate to another. What we have seen through the proliferation of latency monitoring systems across the trading world, whether DMA providers, market data providers or trading desks, is that often the problems in managing latency within an environment happen between the cracks. Most firms have a good handle on latency in their own environment because they have engineered it well, but when they connect into a counterparty, it gets tricky.
A trader who sees a slowdown in response time will want to understand why they have missed trades or why their fill rates are low, but there are multiple places where that latency could have occurred. One place is in the exchange matching engine, which in some respects is unavoidable. If there is considerable interest and activity in a symbol at the same time, those orders will have to queue in the matching engine, purely as a result of market activity. The latency might also have occurred in the exchange gateway. It is common practice for exchanges to load balance across multiple gateways to accommodate high volumes, and you might have hit a slow gateway. Perhaps the service provider you connect through may have oversubscribed their network and you could be caught in cross traffic unrelated to trading. We have seen all these things happen, so the ability to see where the latency is occurring requires a consistent set of time stamps across the architecture.
Most exchanges already employ latency monitoring in their own environment, and inter-party latency and the sharing of time stamps, while less important within the exchange, enables them to work with their members to identify areas of latency. The benefits unlocked through interparty latency are somewhat biased towards the end traders, but they also extend to brokers and market data providers, who receive better quality execution feeds and market data speeds, respectively.
For exchanges, the need for latency transparency is becoming a standard requirement as latency has become a competitive differentiator. To the extent that exchanges are comfortable with their own infrastructure and are ready to compete on their latency, they will want to share their latency measurements with members. In my experience, venues and brokers are no longer as reticent to share their latency figures as they were before.
Version 1.0 Rollout
Much of the work that we have done with Version 1.0 involved deciding how to produce a standard that on one hand is simple enough to be easily implemented, while ensuring it can still perform in all the basic use cases. Version 1.0, due out in December 2011, is clean and simple and emphasizes the core capability to publish time stamps. We have agreed on the technical scope and it is now going through the formal review procedures required to be standardized by FPL, including a public review. The other important part to be done before it is real is to get two different implementations. There are a number of things that will be ready in a few months’ time, such as distribution through multicast and the ability to automatically group several measurements together across the trade, which we will include in the next version later next year.
Nomura’s Jeremy Bruce summarises the current state of play in terms of European liquidity venue fragmentation, and focuses specifically on venue ownership and geographical concentration of equity execution venues.
Ownership and Location of European Equity Trading Venues
In the past few two years we have seen not only increasing liquidity fragmentation in Europe, but a significant change in the pecking order of exchange and venue size. The diagram below lists all venues with a market share of greater than 1% as well as referencing other smaller venues. As can be seen, it shows both the rise of venues, such as Chi-X Europe and BATS, as well as the proliferation of light and dark venues owned by the preexisting exchanges. Chi-X Europe in particular, is now comfortably the largest pan-European venue. There are currently two proposed mergers on the table, firstly between NYSE Euronext and Deutsche Boerse, and the second between Chi-X Europe and BATS.
The old model of a country having a primary exchange located within its borders (normally in the main financial district), where its companies’ stocks almost exclusively trade is no longer relevant. As corporate ownership of the manifold liquidity venues becomes more complex and blurred, it is perhaps more meaningful to look at the actual location of the exchange. When we say exchange, we are actually referring not to the administrative or corporate headquarters of the exchange firm, but to the location of the IT infrastructure that runs the actual live exchange matching engine. This location is then a physical data centre building, with an additional failover backup site.
FIX Flyer’s Brian Ross briefs readers on the latest from Mexico including the regulatory and technology upgrades.
In the last 12 months dramatic changes have occurred at Mexico’s stock exchange and among its brokerage clients. Cross border partnerships, technology upgrades, new FIX infrastructure and business friendly regulatory changes have opened the Mexican market to high frequency trading (HFT).
While US regulators can be seen to scold HFT firms, the Mexican market has opened its arms. The Mexican Exchange (BMV) and its brokerage firms have upgraded their infrastructure and sought business opportunities north of the border. Earlier this year after the CME Group and the BMV signed their partnership, high frequency traders on the CME Globex trading system began to route orders to the Mexican Derivatives Exchange or MexDer. Today 90 percent of average daily volume on the MexDer comes from high frequency traders north of the border.
Mexico’s brokerage firms have completed significant infrastructure upgrades. Last spring only a few brokers in Mexico could handle a highfrequency hedge fund client and many Mexican brokers could process no more than one connection to the Bolsa Mexicana de Valores (BMV) at a time. The landscape has changed quickly and improvements in broker and exchange systems have ushered in a new capacity for speed in the transmission and execution of orders in Mexico.
Over the summer a major milestone occurred for the industry. Working with the BMV, Mexico’s brokers completed an industry-wide upgrade to FIX 4.4. The top 25 brokers are now certified with FIX 4.4 to the BMV. Leading the way, are brokerages like GBM, Interacciones, Actinver, UBS Mexico, IXE and others.
Now that Mexican brokers speak FIX 4.4, all of the order routing to the BMV can now be done through FIX allowing the BMV to retire the antiquated SETRIB protocol. The only way the BMV will allow Mexican brokers to continue to use SETRIB is by paying excessive fees, and even this will not be allowed by the end of 2011. Retiring SETRIB sets the stage for more positive changes in the industry and at the BMV.
Work is already underway to upgrade the BMV’s trade matching engine. The existing engine was built in the 1990s for a Tandem mainframe. Retiring the Tandem has many benefits. Faster order matching and processing is high on the list. In addition, more choices for application and software vendors and significant cost savings are expected. Retiring the mainframe will also eliminate the scheduling nightmares associated with the limited availability of the central mainframe for testing with the broker community. The new matching engine will be hosted on modern Unix based hardware. The release of the new matching engine and infrastructure is planned for the first quarter of 2012.
Another important milestone is the availability of a state-of-the-art co-location facility at KIO Santa Fe. The BMV infrastructure is located here and starting in October it will be easy for brokers and third party providers to collocate order routing and market data in this hosting facility leading to high throughput low latency services.
While all of the infrastructure and matching engine upgrades are momentous, they would bear no fruit without the simultaneous modernization of Mexican regulations. The initiative to modernize Mexico’s regulations, called RINO, began a year ago and phase two is due to rollout in the fall of 2011. The goal of RINO is to conform Mexican regulations to international standards. By converging with international standards, regulators hope to bring more international order flow and greater liquidity to the market, resulting in increased investment in the Mexican market.
While regulations in the US like Sarbanes Oxley and Dodd-Frank can be seen to drive businesses offshore, the regulatory changes in Mexico are removing handcuffs from businesses and facilitating opportunities. The first step forward occurred early this year with RINO I. RINO I allowed brokers to have multiple channels to the BMV’s electronic trading system. Previously all orders were in a single queue. Multiple access points per broker provides more flexibility in executing strategies and handling client requests, including separate BMV channels for program trading and orders called into the trading desk. RINO I also eliminated sizebased criteria from order management, thus leveling the playing field in the processing of orders. RINO II takes effect on October 10, 2011, bringing more modernizations including pegged orders, improvements in crossing operations, average price operations, price delivery regardless of volume, and decimal bids for fixed income securities.
Crosses, in which a brokerage carries out a transaction through the stock exchange between two of its clients, were permitted previously but the rules were very arcane. Starting in October, the crossing operations will be vastly simplified allowing clients to simply choose whether to cross inside or outside the spread. With this modernization, the BMV hopes to repatriate orders that brokers would previously carry out in the US, where crossing orders was possible using ADRs in dark pools or at the NYSE.
In addition the RINO II regulations a very important new mid-point hidden book order. The orders execute at the midpoint, broker anonymity is guaranteed and the order priority is determined by volume. This is effectively a dark pool. Similar to Xetra, this new BMV order helps the market participants and simultaneously protects the BMV from providers toying with moving into the Mexican marketplace.
As the regulations modernize and the FIX infrastructure hardens, opportunity beckons. Brokers are beginning to push for more high frequency trading algorithms, more efficient routing of international orders, and more sophisticated risk controls, all of which will attract even more international business. As the need for speed grows, co-location previously offered by the exchange may become more strategic, particularly to brokers wanting to attract high frequency traders.
All of this progress was made possible in large part because of the exchange’s demutualization and subsequent listing in 2008. The demutualization coincided with rule changes allowing Mexico’s pension funds or AFORES to invest. Before the rule changes, the AFORES were forced to invest almost entirely in short-term government paper. Today, Mexico’s pension funds are allowed to invest up to 25 percent, in individual stocks and shares and 12 percent in a hybrid of corporate debt and equity capital to allow companies to raise funds to expand businesses.
Considered together, regulatory improvements and infrastructure updates have morphed the BMV and the Mexican brokerage community into a thriving and modern marketplace. The BMV reported a 22 percent jump in earnings last year, with operating income increasing 70 percent in the last three months. A record six initial public offerings made it to market last year and overall trading volumes rose 50 percent in 2010. This year Mexico’s IPC index has tested and hovered near record highs.
In 2011 there are fewer IPOs, but trading volume remains strong. The order-routing agreement signed with Chicago’s CME Group has opened Mexico’s derivatives market to the world. Now, electronic trading infrastructure and investor friendly regulations have set the stage for act two.
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.