By Andrea Ferancova
After the successful adoption of electronic trading technology in developed markets, traders are now increasingly using algorithmic strategies to achieve their goals in more exotic markets. This trend is growing rapidly with new players coming to the market every day, in an attempt to grab some marketshare and make the best of the opportunities available. Thanks to technology and its active engagement by local players, it is now easy to connect and easy to trade in Eastern Europe.
So much has changed since that first electronic trade in Eastern Europe by one foreign institution! Starting the trading technological implementation very recently (after the communist era) had its own advantage, as all the exchanges were founded on an electronic base, but there have nonetheless been multiple barriers to reach the markets directly – local legislation, closed-end technology and protectionism to name a few.
Just few years ago, exchanges existed without any interface to allow connectivity from external systems, and orders had to be retyped manually. On those where some connectivity was possible, algorithmic processing was forbidden by law, and the frequent modification of order parameters was something that regulatory bodies viewed as market manipulation. Latency was measured in seconds, and the number of orders one could process was only limited to between tens and hundreds a day.
Apart from the trading obstacles, up until recently it was also very difficult or expensive to settle. Thanks to rules that vary from exchange to exchange, unconventional order types and behavior quite different from that of the developed markets, the region has earned its reputation as the “Wild East.”
It took some time and considerable effort to navigate a common and more reasonable course, but it has paid off in terms of market accessibility. Though there is lots of room for improvement, simple trading solutions can be found on most markets. Offering Direct Market Access (DMA) to Eastern Europe has been very challenging for us for many years, due to the non-existence of a system that would cover all or at least a majority of the markets.
Vendors were not keen on investing in developing products for closed markets due to extremely limited demand and those who tried, discovered it was difficult to sell such a product, as they would be interceded by either a lack of documentation or language barriers.
Local vendors supported only local exchanges and offered only closed-end applications. Not to mention that no one had heard of FIX or any other connectivity option either. It was also difficult to find vendors delivering options for a reasonable price, which makes a lot of sense, when you take into account the limited volume and money that could be generated on any one market. Since the markets were really difficult to reach from outside, it was very difficult to become a member locally, and almost impossible as a remote member. So, as the market was limited to only a handful of prospective customers, it simply did not seem reasonable for system vendors to offer a “bigger” solution. So, if you were to offer a particular market to trade, you had to either have a local solution and request an expensive, tailor-made integration to other market infrastructure; or get a buggy system from a renowned vendor (if any existed); or just build it completely by yourself . Local vendors were not really motivated to create and offer solutions for regional markets apart from their local ones and the big “global” vendors offered (and still offer) only incomplete “alpha state” solutions and getting them to work proved almost impossible, requiring huge investments especially as no one vendor offered solutions for many markets, making it necessary to integrate the systems of various vendors.
The Present and Future
Today it is all so different with most of the technological development and deployment covered and even the vast majority of exchanges are user friendly. We worked in close co-operation with the stock exchanges and we have managed to bring latency down to milliseconds and tenths of a millisecond with the capacity of processed orders now in the hundreds of thousands. So, stock algorithmic strategies can finally be used, avoiding any information leakage to executing brokers. Anyone not willing to disclose his order can rely on his/her own machine only.
There remains a lot to be improved and some markets are still in the early stages, even if integration plans for a common platform are in place. Although stock algorithms do work and perform quite well if properly implemented, the next challenge is to develop ones that would actually understand the underlying market and be able to outperform their stock competition. Most of the work to be done is in trading cost optimization, while using advanced and less common order types that could be cheaper to execute.
Work also needs to be done regarding clearing. We would ideally prefer to have clearing centralized through one European house, but in both Western and Eastern Europe that is still sometime away. We are seeing some central counterparties looking at penetrating the region and it will not be long until they provide a “full service” similar to that seen in developed markets.
All of these changes will bring a huge benefit to the end-users. The possibilities to earn money are many, and this is being realized by more and more people. The combination of volatile markets and the FX component, is inviting speculative intra-day traders, as well as long-term investors. Multiple listings, combined with local inefficiencies also offer greater arbitrage opportunities.
The outlook in Eastern Europe still looks very different on a country by country basis. However, at least in theory, we are hoping that all countries will migrate to a single currency one day and this will yield easier and cheaper access to our electronic world.
By Andrea Ferancova