By Adam Toms
Nomura already had an established product offering in Japan and a leading position on the Tokyo Stock Exchange, the Lehman acquisition has added scale and depth to our global execution capabilities, broadening the distribution network across clients globally and improving global liquidity access for clients. In Europe we took advantage of a three month window out of the market to focus on relaunching with a lower latency, higher capacity, more technologically advanced offering. In addition we recognised that equity markets are changing from both the execution and client requirement perspectives. Through analysis of the products and services currently being used across the Street, we have aimed to position our business for both the current market conditions and build in the flexibility to adapt to the changing dynamics of the equity markets in future years.
Whilst the opportunity to rebuild a business from a standing start was compelling, the challenges involved in doing so were immense. In the three month period prior to the launch of the Nomura platform, the entrance of new trading venues across Europe continued at a great pace. While this has taken second stage to the greater financial services turmoil, it is nonetheless a key development which will have a profound effect on the way the European markets operate. From a business resumption perspective, we needed to reconnect the business to 31 different exchanges and MTFs in 25 countries in Europe. There are numerous third party solutions available for venue connection in place of a direct membership, but we believe direct access is the key to enable us to utilise our own technology in a homogenous way across the platform. This gives us the opportunity to build ultra low latency infrastructure, and not be reliant on external providers for our core business. As part of this, to ensure we are able to provide a highly robust platform with built in failover provision, we run parallel data centres, each with two connections to each trading venue, giving us four routing options for business continuity purposes.
We believe that this accelerated production environment has enabled us to attain significant performance improvements and latency savings across the board. We’ve worked with technology partners Intel Corporation and SeaNet Technologies Inc in the Intel FasterLAB to evaluate and then tune on new hardware and software that has reduced engine latency across the core algorithmic strategies by up to 94%, from 10 milliseconds to in some cases less than 640 microseconds. Migration to dedicated, ultra low latency market data feeds has improved access speeds by over a third, with immediate impact on slippage numbers. To further enhance users experience innovative anti-gaming logic has been applied to Nomura’s dark pool crossing engine, NX.
The development of smart-order-routing (SOR) technology has also been a priority, as this has presented a significant tangible change in European equity markets over the last 18 months. In the immediate post-MIFID period, the industry initially placed a lot of attention on whether or not SOR was offered in a binary sense. Due to significant differences in sophistication and logic offered by providers, dealing desks are now increasingly starting to differentiate on how good the technology is. In choosing a SOR, the most important consideration should be whether it offers better execution and price improvement and this is not achieved simply by connection to a greater number of MTFs. Instead, it is the ‘smartness’ of the SOR that will determine the outcome, including taking into account factors such as lit and dark venues being treated differently. We have invested heavily in our SOR, adding distinctive logic and sophisticated algorithms to maximise liquidity capture and execution likelihood.
As the data demands and complexity of algorithmic trading engine logic continues to increase steeply, Nomura has made significant investment in hardware to accommodate and provide future capacity for both the huge increase in the number of micro decisions and order transactions. Each algo instance, for example, has had capacity increased from 100,000 orders per day to in excess of 4,000,000.
Client connectivity presented an even more significant challenge. Previously, we had in excess of 2000 client FIX connections in place globally. We offer a flexible solution to connect to various execution channels, including Futures, Cash, PT, Algos and DMA, via the same or individual connections.
A significant amount of these connections, particularly for electronic trading products are via third party vendors. We had to rapidly certify an enhanced set of algos, rather than electing for a more restrictive basic / pre-canned approach, onto a number of strategically key vendor platforms. Partnering with these vendors we were able to relaunch with 15 vendor platforms live, and have subsequently expanded this further.
Exchange connectivity, vendor integration and direct client configurations also need to be replicated across the US and Asia products. This presents interesting technology challenges to identify where single connections can be used for multiple regions, or where clients would like to elect for specific routes. There is also overlap available for vendor integration where we can replicate algo enrichment screens, but the back end needs to reflect the regional and model differences.
On a broader technology level, the main challenge has been integrating front office and back office components. This was particularly important from a liquidity management perspective to ensure that all the execution channels across the floor have access to the same trading technology. This enables all order flow to be routed via our NX dark pool and onwards to our SOR, maximising crossing potential. Linking all the teams together and unifying our systems, while developing new products, has proved a substantial test for the IT team, but one that was achieved within a compressed timeframe.
The relaunch of a business of this scale has been a huge challenge from a technology perspective. But we took this opportunity to improve and re-optimise our current and future operations. The sheer complexity of both the internal and external integration work has underlined the reliance we have as a business, and as an industry, on a great range of technology and all the nuances that go along with it. Despite some interesting interpretations we have encountered along the way, the presence of FIX as an industry standard protocol has been fundamental in achieving this scale of business resumption with clients in such a short period of time.
By Adam Toms