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High Frequency Trading Tools and Technologies. 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)

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high frequency trading tools and technologies

High Frequency Trading Tools and Technologies

Presented by

Larry Tabb (Founder & CEO)

agenda
Agenda
  • To the winners go the spoils
  • Buy-side needs multiple tools
  • Tools
    • Dark pools
    • Flash
    • Sponsored access
  • Technologies
different trades need different tools
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

slide4

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%

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

when trading at the exchange you are competing against the marketplace

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

Not best bid

Sell

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
sponsored access provides thin gateway veneer between client and exchange
Sponsored access provides thin gateway veneer between client and exchange
  • Sponsored access allows brokers & other trading firms to trade directly on an exchange using the access broker’s credentials
    • Mostly for liquidity providers / high frequency traders
  • Issues are
    • Risk management – order goes to the exchange before broker sees it
      • If they fat finger an order or the trading model goes errant then the broker is on the hook
        • Firms are developing technology to mange this
    • Equal access
      • Easier to co-lo / obtain sponsored access than ever before
    • Better understanding of liquidity in exchanges vs. dark pools
      • Exchanges have open access – dark pools don’t
      • Brokers & dark pools usually get order flow before exchanges
      • Dark pool order flow is more protected than exchange liquidity
        • Otherwise execution quality would be worse, and
        • Institutional investors would shun dark pools like the plague
while all orders need to be represented by a broker they don t need to go through brokers pipes

Sponsored Access

Matching

Venue

Market MakerLiquidity Provider

Order

Execution

Broker

Execution

Traditional Access

Order

Order

MatchingVenue

Investor

Broker

Execution

Execution

While all orders need to be represented by a broker they don’t need to go through brokers pipes
slide11

Sponsored Access Benefit

Speed to External Matching Venues

Matching

Venue

Order

Market MakerLiquidity Provider

Execution

Execution

Broker

Traditional Access Benefit

Unique Liquidity from Other Customers

Investor

Exchange

Orders

Investor

Broker

Investor

ECNs

First

Second

Investor

Dark

Pool

Sponsored access benefit is exchange execution speed which does not necessarily mean access to best orders
slide12

Traditional Access Benefit

Unique Liquidity Comes from Customers Order Flow

Traditional (Better)Liquidity hits Brokers First

The majority of orders come through brokersfirst. As such they firstmatch in broker crossing networks &

dealers’ dark pools – unless prop shops also co-lo or have high speed access to dealer dark pools

Investor

Exchange

Investor

Broker

Investor

ECNs

Orders

First

Second

Investor

Dark

Pool

Sponsored Access Challenges

Sponsored Access Challenge

While access to co-loed matching engine is quick, significant volume (and better liquidity) comes through brokers (institutional and retail orders).

Co-lo Facility

Investor

Fast

Matching

Venue

Market MakerLiquidity Provider

Broker Data Center

Not as fast

Broker

Matching

Venue

Dark

Pool

Dark pools generally get access to best order flow – which is hard for sponsored access firms to get access to
the amount of data that needs to be processed is astronomical
The amount of data that needs to be processed is astronomical

August 13, 2009

PITCH, ITC 2.1, DirectEdgeX, TotalView-ITCH 4.0,UQDF, UTDF, ArcaBook for Equities, CQS, CTS, OPRA, Canadian Venture Exchange Level 1, Toronto Level 1, NASDAQ Index Dissemination Service, NASDAQ Trade Data Dissemination Service, NYSE OpenBook --- Source: Exegy – marketdatapeaks.com

high frequency trading the tools and technologies

High Frequency Trading The Tools and Technologies

Presented by

Larry Tabb (Founder & CEO)