Exchange Roundtable: Regulations And Technology In The US, Chile, Mexico, Turkey And Greece


Exchanges are standardising on the FIX protocol, improving and upgrading their systems as regulators modernise, improving local markets and attracting foreign investors as key goals. What kind of progress are they making? We have organised a roundtable of exchange leaders to discuss recent regulatory changes and improvements in technology in the Mexico, Chile, Turkey and Greece.

Exchanges in Mexico, Chile, Turkey and Greece have made progress and attracting institutional investors who are looking for familiar rules across markets. While the US investors continue to push the envelope, US regulators strive to raise the bar on oversight and surveillance. But what are the challenges ahead? How does the FIX Trading Community facilitate the discussion around business practices beyond the widely adopted FIX messaging protocol?
Here is our panel of leaders from exchanges around the globe:
• Moderator Brian Ross, CEO FIX Flyer
• Susan Ameel, Chief Compliance Officer, National Stock Exchange
• Enrique Ibarra Anaya, Senior VP of Technology, Bolsa Mexicana de Valores
• Andres Araya, CTO, Bolsa de Comercio de Santiago
• Ali Coplu, CIO, Borsa Istanbul
• Dimitris Karaiskakis, COO, Hellenic Exchange

Brian: Susan, what do you see on the horizon in the next year from US regulators?
US regulators will be busy implementing the consolidated audit trail rules. The consolidated audit trail will allow regulators to perform cross market surveillance using a central repository on a T+1 basis.

Brian: And what are some of the challenges posed by US regulators going forward?
US regulators must be able to quickly analyse data, and help members quickly identify problems that may impact the integrity of the markets. The SEC has requested that each exchange adopt “kill switch” rules and technology to help achieve this goal. Regulators need to build on this process by identifying other issues that can be spotted through effective data analysis and to assist member firms to identify patterns that appear to be problematic. Early detection means that firms can address issues in a more timely fashion, improve a market’s overall integrity, and reduce the instances of the problematic activity.

Brian: Susan, do you see areas that could be improved to assist in this process?
Standardised data and synchronised timestamps would be key to this effort. The FIX protocol provides a starting point for obtaining standardised data. The trading community has mutually agreed to use the FIX protocol to communicate the data elements that are needed to establish the material terms of a trade. By using available standardised data, you are not recreating the wheel or putting any additional burdens on your members. In fact, each exchange publishes a FIX spec against which each member is expected to program their messaging. Of course additional information is always required but regulators should try to be as efficient as possible. However, one problem that needs to be solved is the synchronisation of timestamps as well as the required granularity of timestamps.

Brian: Enrique, Mexican regulators moved to modernise their markets with RINO initiatives in 2010 and 2011 and the BMV successfully welcomed HFT, launched a new trading engine and built modern co-location facilities. Can you tell us about the BMV’s new trading engine and other initiatives you are planning for your members?
Yes, the BMV successfully launched our new low-latency trading engine MoNeT in the fall of 2012 and we are now working in the normal functional evolution and maintenance of the system. Two new versions have been released in 2013 with a number of functional enhancements for connectivity, latency, order types, risk management and more. We are also working to provide more info in our market data feed to allow our members and trade workstation vendors to develop a trading workstation system with the same level of information that the trading workstation of the Mexican Stock Exchange (BMV) offers. The intention of this initiative is to stimulate the development of new trading workstation solutions to allow the brokers to have diverse alternatives and to eliminate the fact that the BMV is the only provider of trading workstations for the brokerage houses.

Brian: Enrique, what changes are on the horizon in 2014 for members of the BMV?
In 2012 our new trading engine, MoNeT, introduced the feature of “market filters”, which works to reject orders with obvious mistakes (fat-finger errors) to protect the brokers. During 2014 several functional extensions will be added to the filters that monitor price and volume in the new orders. We additionally use dynamic and static price fluctuation ranges that will be further optimised in 2014. Our market is not currently anonymous and we will explore the adoption of an operational anonymity scheme in 2014. Our trading engine supports the market anonymity mode, we will discuss its use with the brokers and the regulator. We are also considering making functional adjustments to our pegged orders in 2014. Finally, next year we will launch a new market data product based on multicast transport. Our current market data product uses unicast TCP connections.

Brian: Andres, in Santiago you have also been very busy. What initiatives have you been pursuing for your members in 2012?
One very important initiative is the Derivatives Exchange which we aim to offer to all the capital markets, particularly institutional investors and intermediaries both domestic and foreign the ability to trade in Chile investment and hedging instruments in an open and regulated market, starting with a first step in equity index futures, then continue with currency futures, fixed income futures and options. The development of a derivatives market in Chile will enable breakthroughs in the process of diversification, risk management, liquidity and depth of the domestic capital market, and at the same time represent a major boost for the local market, facilitating the use of the capital market not only for local investors, but also to a large number of foreign investors.
The Chilean capital market has grown about 10 fold in recent years in the amount and number of operations, so there is now a natural demand for new services and products, making it necessary to develop a regulated derivatives market. The derivatives market of the Santiago Stock Exchange has been developed with the participation and assistance of BM&F BOVESPA who had tremendous success in the creation, operation, promotion and marketing of their derivatives market, an example that we hope will be repeated in Chile. It is noteworthy that the Derivatives Taxation Act enacted in October 2011 incorporates tax exemption on capital gains for all foreign investors, which will undoubtedly facilitate the participation of international investors in the derivatives market in Chile.

Brian: Andres, were there any other important initiatives in 2013?
In September of this year the BCS in conjunction with ITAU BBA began trading the first exchange traded fund that tracks the performance of the Main Chilean Index (IPSA) of the Santiago Stock Exchange named as “IPSA It Now”. Last year, ITAU BBA won the tender which carried the exchange to create ETFs of its major Indexes. This process gave ITAU the exclusive use of trademarks IPSA, IGPA and Inter – 10 for a period of ten years, allowing the creation, negotiation and trade of ETFs in the national and international market.
Brian: Andres, what do you have planned for 2014?
The Santiago Stock Exchange is making a major effort to modernise the entire infrastructure for fixed income electronic trading markets in which the BCS has almost 100% of market share. BCS will enable access to these markets via the FIX protocol and in addition to significantly increased transactional capabilities such as reduce latency and increased throughput, we are also making a major upgrade to all clearing and settlement systems of the BCS, in order to upgrade to new technologies in production and related to electronic trading.
Andres, what about your regulators? Are they asking for any changes in 2014?
The Santiago Stock Exchange is in a program of international certifications ISO 27001 and ISO 22301 related to information security and business continuity. Conscious of our leadership position in the local market, we want our best practices to able to be verified by any third party. The BCS is also in a broad initiative to incorporate COBIT 5 for IT Governance. We also have some new trading regulations around Market maker obligations that we need to address. We are working with the SVS and the Central Bank to clarify how the derivatives market will work. We expect the authorisation in October or November, and full production two or three months after that.
Brian: Andres and Enrique, how do your exchanges handle trade surveillance today?
The BCS in 2010 implemented a surveillance solution developed in-house with the support of StreamBase (recently acquired by TIBCO). Thus, at present the BCS uses Complex Event Processing technology (CEP) for processing real-time correlations that support the market monitoring area more efficiently.
Enrique: In 2008 we developed at the Mexican Stock Exchange a system for market surveillance that we call Vigia. The system receives in real time the market data feed and, in real time too, looks for patterns of suspicious market activity. The end user has the ability, through the tools that Vigia offers, to specify new patterns. The system has access to the data warehouse in order to use historical information as needed. An ongoing initiative is to evaluate the use of SAP Hana, an in-memory database that could be used to host both the online and historical information and produce substantially faster computation results. In addition, we are re-developing the system of our central counterparty and this new system will include both real-time pre and post trade risk controls.
Brian: Ali, what about Istanbul? What current initiatives are you pursuing for your members and what changes are on the horizon in 2014 for your members?
We are currently adding a FIX interface for orders. The first release is expected in October with subsequent
improvements over time. This is a significant change that we hope will bring more order flow into Turkey. Additionally, starting Jan 1, 2014, the Borsa Istanbul will begin to disseminate Sarajevo bourse (SASE) data locally and abroad. In 2014 our co-location center for market participants will go live.
Brian: Ali, how does the Istanbul Borsa handle trade surveillance today?
We have an in house developed two-tier surveillance system. We share it with our regulator for monitoring market activities. The system works real time and on investor basis so that all the orders and trades that lead to alert signals can be identified including the immediate beneficial owner of the trades. Investors have unique registry ID given by Central Registry Agency of Turkey, Merkezi Kayıt Kuruluşu-MKK to trade and this enables us to track the investors properly. A wide spectrum of alerts and analysis tools for detecting market abuses such as market manipulation, insider trading or any other violations of rules and regulations exist in the system including new alerts and search tools which are developed continuously. We work in close cooperation with the regulator in Turkey, the Capital Markets Board-CMB, not only in daily monitoring, but also during the other stages of surveillance and investigations. Since Borsa Istanbul and CMB have a common system, both parties are simultaneously aware of the on-going activities in the market and have communication through mail and telephone and while detecting the unusual movement, while one party is focusing on trading patterns of possible offenders, the other party may reach out to the public.

Also we have automated stock specific circuit breaking system which stops trading for any equity with excessive trading (volume movement) or abnormal price movement. The system checks all trades for certain criteria. Given an abnormality on a stock, at the first stage trading is suspended for 15 minutes and resumes automatically after this time. If the excessive activity or price movement does not diminish and some other conditions exist, a second level is reached. This time trading stops until the end of the trading session, and the netting facility is removed starting from the next day, for trades on the relevant security for 15 days. In case of any automated suspension, public will be informed by an immediate announcement through KAP (Public Disclosure System of Turkey) which creates public awareness and gives investors a space to review their buying or selling decisions during the temporary suspension period. And naturally, each circuit break initiates an investigation on the orders and trades in terms of manipulation or any other market abuses.
Brian: Do your members want real-time trade surveillance?
In Turkey surveillance is the exchange’s responsibility given by the new Capital Market Law which went into force by the end of 2012. As mentioned above we submit our findings to CMB as a report in order to provide enough evidences for legal procedures against offenders. That said, some of our members have interest in having their own surveillance tools and filtering mechanism – limited to orders and trades routed through their facilities. This is mainly for compliance purposes and in order to provide enough shelter for avoiding customer complaints about operational abuses or negligence. Since most investors prefer to use more than one member/account to trade simultaneously, it is difficult for any member to see the complete market picture by monitoring orders/trades originating from its own sources.
Andres: The Santiago Stock Exchange implemented pre-trade risk controls for trades via DMA and the other mechanisms allows in order to take control of any single transaction. At the same time, we allow Drop Copy Services to members’ systems in real time for their own related risk controls.
Brian: Dimitris, how does the Hellenic Exchange handle trade surveillance and do your members want real-time surveillance?
Although we operate an online and historical surveillance system which we own and built, we are currently expanding the functionality and scope of the system by acquiring a new surveillance system. We are in the last phase of a procurement procedure with a timeframe to have a new live surveillance environment in Q3 2014.
Regarding our member firms, DMA services have been offered for some years, but our brokers haven’t yet expressed any interest in real time surveillance services. I think this is something that will come up in our environment in 2015, so we have some preparation that we already planning to do.

Brian: Dimitris, can tell us what current initiatives you are pursuing for your members and whether there are any changes on the horizon in 2014 for your members?
Except from the DMA that we offer through FIX and our proprietary protocol (ODL), we recently permitted sponsored access through a central FIX engine and OMS for member clients in order to have direct access to the trading system. Members can apply permissions and filters to the central OMS for orders to be executed under their name.
Regarding 2014, one big project that is going live in Q1 is the consolidation of the two trading systems (cash and derivatives) into one. Actually we are expanding our equity trading and clearing systems to host the derivative market. So we offer one API (FIX and ODL) to access the market, one API for clearing and one API for market data feed. This is a big change in our market and creates a more efficient and cost performing market for all participants.
Brian: Dimitris, what about your regulators? Are they asking for any changes in 2014?
Following the ESMA guidelines our regulators ask for more compliance and audit reports not only from the exchange but for the members offering DMA services also.
Brian: Ali, tell us about your systems and technology that you support How does the growth in Turkish economy affect your decisions going forward?
Over the past decade, Turkey has experienced structural changes which have led to substantial economic advances. By 2011, Turkey became the 16th largest economy in the world and the 6th largest economy in Europe.
A fully automated Equity Market Trading System of Borsa Istanbul partially started on December 3, 1993 and became fully functional with all stocks tradable on an electronic environment after October 21, 1994. Trading system was purchased from a US Company called TCAM systems with the source code. During the course of time capacity in terms of number of transactions and latency has improved considerably. As of March 31, 2013, the throughput of the system is almost 5,000 orders/second and the latency at the peak time of order flow is below 1 millisecond via FIX interface.
The trading system for futures and options market has been built upon the trading system purchased from an Australian company, CSL, which was later acquired by NASDAQ-OMX. Borsa Istanbul has the source code and full authority to amend the code. The trading system supports continuous price auction as well as price fixing (call auction) mechanism. The system used by TurkDEX as the trading platform is a different version than the one used by Borsa Istanbul. After the planned takeover of TurkDEX, two different versions will merge into a single trading platform.
The trading system infrastructure provides an online real-time connection with Takasbank and makes it possible to monitor all orders, transactions, margins and positions on account basis. Various types of orders including limit, market, keep remainder and market contingent (stop loss) orders are supported by the trading system.
Regarding growth in the Turkish economy, the number and diversity of listed companies play a significant role in the success of our exchange. Currently, 417 companies with a market value of around $300 billion are listed. Our aim is to raise the number of traded companies to 1,000 by 2023. In line with IFC vision, we also started the Listing Istanbul project in order to attract foreign companies for listing at Borsa Istanbul. Accordingly, we will be a major funding source for both Turkish and foreign companies and support Turkey’s growth on years to come. The demand for services of an exchange is directly proportional to the size of its product range.