High Frequency Trading Tools and Technologies

Presentation Transcript

Presented by

Larry Tabb (Founder & CEO)

Agenda

To the winners go the spoils
Buy-side needs multiple tools
Tools

Dark pools
Flash
Sponsored access

Technologies

Different trades need different tools

Low Impact (size)

1) Blocks/Dark pools

2) Dark Algorithms

Quiet Accumulation

1) Dark / Opportunistic Algorithms

2) Blocks/Dark pools

3) Broker Capital

Size

Delegation
VWAP/Implementation Shortfall Algorithms
2) Direct Market Access

Need it, want it, got to have it

1) Direct Market Access

2) Accumulation Algorithms

3) Broker Capital

Immediacy

Source: TABB Group

Dark pools are steadily gaining market share in both the US and Europe

12.5%

11.5%

10%

% Traded

Volume

(dark)

7.5%

7%

5%

4%

3%

2%

1.5%

No. of

Dark

Venues

1%

18

3

27

4

32

9

45

21

52

29

53

36

2005

2006

2007

2008

2009

2010

US

Europe

Source: TABB Group Estimate

National

Exchange

Broker

1 of 9

When trading at the exchange, you are competing against the marketplace

Brokers, Buy-side, Prop, and Other

Bidders for Liquidity

Buy-side/

Investors/

Liquidity takers

Source: TABB Group

in a dark pool you get first look and generally better than market pricing

National

Exchange

Broker

1 of 9

1 of 1

In a dark pool, you get first look, and generally better than market pricing

Broker

Brokers, Buy-side, Prop, and Other

Bidders for Liquidity

Buy-side/

Investors/

Liquidity takers

Broker

Dark

Pool

Source: TABB Group

HFT Tools

Co-lo

Being first is everything

Low latency connectivity

Fiber and networking

Market Data infrastructure

Direct feeds

CEP
Models
Execution engine
Risk modeling

Flash orders – a second chance to match orders before they are routed

Not best bid

Sell

Exchange w/oBest Price

Will match or better bid?

Retail

Investor

Retail

Broker

FreeExecution

Market MakerLiquidity Provider

25 to 30cents/100Shares

Yes / Trade

Market Maker

Liquidity Provider

Best bid

No /

No Trade

Exchange w/Best Price

Problem is if MM/LP executes against the better price and/or changes quote

Retail Order Execution Using Flash Order
Retail order comes into broker
Broker routes order to ECN/Exchange using “Flash Order”
If ECN/Exchange does not have the best price it either needs to match the best price or send to the Exchange/ECN displaying the best price (Reg NMS) – maximum time .5 seconds
Since the ECN/ Exchange doesn’t have best price it flashes order to market markers/liquidity providers (typical time .02 to .05 seconds)
If MM/LP wants the order it either needs to match or better bid
If not – order must be routed to exchange showing best price
Typical flash order is free – typical charge to route order to another ECN/Exchange is 25 to 30 cents per 100 shares
The challenge with this order is that the market maker / liquidity provider gets to see this order up to .5 seconds before it is routed to the exchange with the best price
This is enough time for the market maker / liquidity provider to either change their quote or take out the lower price, change quote and execute the order at the higher quote – locking in a profit