Using FIX to Connect LatAm Markets
Andres Araya Falcone of the Santiago Stock Exchange explains how FIX is increasing the range of services available to traders in Chile and throughout Latin America.
How is FIX facilitating DMA into the Santiago Stock Exchange?
The first concept of DMA in Chile began with what we call “direct traders” (buy-side traders) facilitating these specially authorized institutional clients, to send direct orders to the market via a “broker sponsor”. Thus, pension and mutual funds, insurance companies and other institutions, using trading terminals provided by the Stock Exchange, can trade directly in our market. The next natural step was the incorporation of electronic networks to attract order flow from the U.S., Europe and neighboring countries in Latin America, especially Brazil.
In 2006, we built the first FIX interface using version 4.0 to connect to the Marcopolo Network, to attract the order flow of our local equities market. After that, the Santiago Stock Exchange launched its initiative to modernize the equities electronic trading system and developed Telepregón HT, jointly with IBM, which went live in June 2010. This system is ready for algorithmic trading flow since it supports a throughput of over 3,000+ orders per second with sub-millisecond latency. In designing the system, we decided to use FIX 4.4 to enable easier connection via DMA with other exchanges, sell- and buy-side firms and market information vendors. This has greatly facilitated the connection to different networks, such as Bloomberg, Fidessa and SunGard, among others. For all these initiatives, FIX has been crucial in facilitating the integration with these listed networks. During 2011 we will announce new network agreements.
Currently, referring to the equity market, 11% of order flow comes from DMA which represents an average of a 27% increase over the last 6 months, today 19% on average comes from Internet retail order flow, and the rest comes from traditional OMS and Trade Work Stations.
As foreign investment into Chile and the Chilean market continues, how will the Santiago Stock Exchange upgrade its platforms to meet increased investor and trader demands?
In 2010, the Selective Share Price Index (IPSA), the country’s main stock market indicator, gained 37.6% in Chilean pesos (equivalent to some 46% in dollars). Share trading on the Santiago Stock Exchange rose to US$60 billion in 2010, up 30.5% from 2009, setting a new annual record. Trading was particularly strong in the second half of the year, which accounted for almost 60% of the annual total, reflecting strong demand from both local and international investors.
At the same time, by the end of 2010, the Santiago Stock Exchange had signed a linkage agreement with Brazil’s stock exchange, BM&FBOVESPA, heralding the latest in a series of cooperative projects being run between Latin American bourses. The agreement, signed on December 13th, will enable connectivity between both exchanges for order routing and market data dissemination. It also includes separate initiatives for further development of the Santiago Stock Exchange’s derivatives market, the establishment of joint initiatives related to settlement, clearing and central counterparty services, as well as access to the BM&FBOVESPA /CME trading platform from Chile.
Market participants in both countries will be able to route orders for stocks, stock options and related derivatives listed on the other’s exchange. Both exchanges will also be able to receive and distribute each other’s market data. Clearing and settlement of orders will be done according to local market rules of listed instruments. These kinds of initiatives imply that the Santiago Stock Exchange’s IT platform has to be prepared to manage more than 6 million orders per day.
What plans does the Santiago Stock Exchange have to accommodate High Frequency Trading and algorithmic order flow?
We are working as an integrator of a state of the art product for algorithmic trading. In conjunction with Streambase, FIXFlyer and IBM WFO, we are creating a product we will call “Broker in a Box”. The idea is to provide a framework for capital markets, including a set of algorithmic order execution strategies designed to achieve best execution, access liquidity, minimize slippage and maximize profits for trading operations. These algorithmic trading strategies (like VWAP, TWAP, Arrival Price / Implementation Shortfall, etc.), are provided as fully customizable EventFlow modules which can be used in conjunction with the frameworks. Trading firms will be able to modify each algorithm to reflect their own “secret sauce” and to differentiate their trading strategies in the market. The Santiago Stock Exchange will provide an “all in one” solution: integrated markets, market data (from Integrated Latin America Market (MILA), NYSE and NASDAQ), co-location, monitoring, local support, etc.
How will MILA provide additional opportunities for investors and traders in Chile and Latin America?
We have been working for the last 13 months in the Integrated Latin America Market (MILA), to consolidate regional stock markets so they may become more attractive for local and foreign investors.
The expertise of each of the three stock markets are different. The Peruvian market for example, is concentrated in minerals. On the other hand, the Colombian stock market is focused on the industrial segment, which is growing a lot and is therefore very attractive for both local and foreign investors. Finally, the Chilean stock market is strong in financial, retail and service industries.
All participants will find that the Integrated Latin America Market provides a standardized trading, clearing and settlement experience with similar market rules and order types, etc.
MILA will attract more liquidity to the market because investors will have wider availability and a greater diversity of companies to invest in, in a bigger and more integrated market. Finally, listed companies will benefit even further from this integration through access to new and increased financial resources for their expansion.
Will High Frequency Trading become a major force in the Chilean market, and will it give rise to co-location facilities, data centers and low-latency data feeds?
Currently, at least three brokerage houses are developing and using their own algorithmic trading strategies for the equities market in Chile. Additionally, we do observe algorithmic trading traffic from foreign brokers, especially from Brazil.
Algorithmic trading is sensitive to round trip latency. A broker who is nearer an execution venue than his peers will have an advantage because he will experience shorter network propagation delays. This has led to the practice of locating algorithmic trading servers in close proximity to execution venue servers. In practice this means that the Santiago Stock Exchange will need to check the following list: sufficient bandwidth to handle peak order and trade flows; support for the most popular versions of FIX; facilities for proximity hosting for algorithmic trading servers; conformance with widely adopted execution mechanisms and order types; monitoring and publishing quality of service parameters; order validation routines to prevent “fat finger” problems, among others.
Therefore, TELEPREGON HT and “Broker in a Box” are the Santiago Stock exchange’s proposals to help our clients start working with these new technologies. At the same time, we see brokerage houses creating their own knowledge bases to participate in this area.