The Electronic Trading Scene in Eastern Europe
By Andrea Ferancova
It’s really happening now. The machine/black-box trading boom has arrived in Eastern Europe, says Andrea Ferancova, Partner and Director of Capital Markets, WOOD & Company.
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.