Exchange Simulators for SOR / Algo Testing: Advantages vs. Shortcomings Alexey Zverev, Alyona Bulda Exactpro Systems LLC
SOR & Other Trading Algorithms <ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><ul><ul><li...
SOR & Other Trading Algorithms Abstract Scheme
Testing of SOR & Trading Algorithms <ul><ul><li>SOR or Algo Trading systems: </li></ul></ul><ul><ul><li>  </li></ul></ul><...
Testing of SOR & Trading Algorithms <ul><ul><li>System Testing </li></ul></ul><ul><ul><ul><li>Algo developers need an abil...
Testing of Trading Systems Connected to Electronic Markets <ul><ul><li>All electronic markets provide test environments wh...
Testing of Trading Systems Connected to Electronic Markets <ul><ul><li>Trading system connectivity layer usually has a spe...
Exchange Simulators: Their Role & Species <ul><ul><li>Exchange Simulators is something that simulates the market in order ...
SOR & Other Trading   Algorithms vs. Exchange Simulators: Abstract Scheme
The Advantages of Using Exchange Simulators <ul><ul><li>Exchange Simulators: </li></ul></ul><ul><ul><ul><li>Provide more c...
The Shortcomings of Using Exchange Simulators, API Emulation <ul><ul><li>An Exchange is a complex proprietary black box sy...
The Shortcomings of Using Exchange Simulators, API Emulation <ul><ul><li>Real life examples: </li></ul></ul><ul><ul><ul><l...
The Shortcomings of Using Exchange Simulators, Market Simulation <ul><ul><li>It is impossible to develop a Market Model, o...
The Shortcomings of Using Exchange Simulators, Market Simulation <ul><li>Real life example: the Exactpro Exchange Simulato...
The Shortcomings of Using Exchange Simulators, Market Simulation <ul><ul><li>Exchange Simulator Design: </li></ul></ul><ul...
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Exchange Simulators for SOR / Algo Testing: Advantages vs. Shortcomings

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Exchange Simulators for SOR / Algo Testing: Advantages vs. Shortcomings

  1. 1. Exchange Simulators for SOR / Algo Testing: Advantages vs. Shortcomings Alexey Zverev, Alyona Bulda Exactpro Systems LLC
  2. 2. SOR & Other Trading Algorithms <ul><ul><li>Introduction </li></ul></ul><ul><ul><li>Examples </li></ul></ul><ul><ul><ul><li>Quoting and Market Making </li></ul></ul></ul><ul><ul><ul><li>Executing substantial orders automatically </li></ul></ul></ul><ul><ul><ul><li>Smart Order Routing </li></ul></ul></ul><ul><ul><ul><li>Arbitrage </li></ul></ul></ul>
  3. 3. SOR & Other Trading Algorithms Abstract Scheme
  4. 4. Testing of SOR & Trading Algorithms <ul><ul><li>SOR or Algo Trading systems: </li></ul></ul><ul><ul><li>  </li></ul></ul><ul><ul><ul><li>Trade automatically </li></ul></ul></ul><ul><ul><ul><li>May or may not receive external instructions (parent orders) </li></ul></ul></ul><ul><ul><ul><li>Connects to one or multiple execution venues (markets, exchanges) </li></ul></ul></ul><ul><ul><ul><li>Connects to low latency Market Data Source to receive current prices </li></ul></ul></ul><ul><ul><ul><li>Makes a decision based on market data and statuses of the orders sent to the external markets.  </li></ul></ul></ul>
  5. 5. Testing of SOR & Trading Algorithms <ul><ul><li>System Testing </li></ul></ul><ul><ul><ul><li>Algo developers need an ability to verify the correctness of algorithm implementation within the trading platform </li></ul></ul></ul><ul><ul><ul><li>Testing of surrounding infrastructure (module testing) </li></ul></ul></ul><ul><ul><ul><ul><li>Example order should be delivered correctly between algo and Market </li></ul></ul></ul></ul><ul><ul><li>Algo Performance Testing / Back testing </li></ul></ul><ul><ul><ul><li>Analysts need an ability to test the algorithm profitability </li></ul></ul></ul><ul><ul><ul><ul><li>This is usually done via back testing (applying algo to historical data) or applying algo against some model simulating market behavior or combination of these approaches </li></ul></ul></ul></ul>
  6. 6. Testing of Trading Systems Connected to Electronic Markets <ul><ul><li>All electronic markets provide test environments where clients are able to test their connectivity. These environments are supposed to be identical to production environment. </li></ul></ul><ul><ul><li>Alternative to testing against such test environment is using a Test Harness.  </li></ul></ul>
  7. 7. Testing of Trading Systems Connected to Electronic Markets <ul><ul><li>Trading system connectivity layer usually has a specific layer isolating other components from the specific Market API implementation </li></ul></ul><ul><ul><li>Exchange Emulator can either emulate a specific API or an intermediate component. This way we can reduce the amount of API development work for our Test Harness </li></ul></ul>
  8. 8. Exchange Simulators: Their Role & Species <ul><ul><li>Exchange Simulators is something that simulates the market in order to test trading systems </li></ul></ul><ul><ul><li>  There are two types Exchange Simulators: </li></ul></ul><ul><ul><ul><li>API Emulators – they emulate exchange connectivity, provide scriptable responses and unsolicited events </li></ul></ul></ul><ul><ul><ul><li>Market Simulators – they simulate market/ multiple markets responses based on some model </li></ul></ul></ul><ul><ul><li>  The API emulator is used to emulate external exchange connection in a controlled manner </li></ul></ul><ul><ul><li>The Market Simulator is for testing algorithms via exchange simulations or historical market data replay (back testing) </li></ul></ul>
  9. 9. SOR & Other Trading Algorithms vs. Exchange Simulators: Abstract Scheme
  10. 10. The Advantages of Using Exchange Simulators <ul><ul><li>Exchange Simulators: </li></ul></ul><ul><ul><ul><li>Provide more control over testing </li></ul></ul></ul><ul><ul><ul><li>Enhance the ability to emulate various events to increase test coverage </li></ul></ul></ul><ul><ul><ul><li>Provide the ability to test the algo incorporated into the real production software (not in Excel or Matlab) </li></ul></ul></ul><ul><ul><ul><li>  ... under the real load mimic the real production environments  </li></ul></ul></ul>
  11. 11. The Shortcomings of Using Exchange Simulators, API Emulation <ul><ul><li>An Exchange is a complex proprietary black box system. Its nearly impossible to emulate its API behavior accurately </li></ul></ul><ul><ul><li>  This black box constantly changes </li></ul></ul><ul><ul><li>Algo Trading Systems usually have to deal with multiple Exchanges </li></ul></ul><ul><ul><li>In a High Frequency Trading network, delays and hardware issues matter. This cannot be simulated  </li></ul></ul><ul><ul><li>The certification by the Exchanges of the Gateways connecting to the Exchanges should happen in Exchange Test Connection, so API emulator development is duplication of effort  </li></ul></ul>
  12. 12. The Shortcomings of Using Exchange Simulators, API Emulation <ul><ul><li>Real life examples: </li></ul></ul><ul><ul><ul><li>  The other side of the barricade is supporting client certification of a trading venue. The following issues could be discovered only via the certification process: </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Missing Execution Reports recovery through resend request mechanism </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>XML instrument definition distribution </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Exotic multi-leg trades  </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Runtime instrument creation </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Implied liquidity dissemination </li></ul></ul></ul></ul></ul>
  13. 13. The Shortcomings of Using Exchange Simulators, Market Simulation <ul><ul><li>It is impossible to develop a Market Model, only some localized bits and pieces </li></ul></ul><ul><ul><li>The Market Model is a valuable intellectual property of buy side players. Information is not available for public research </li></ul></ul><ul><ul><li>Requires a lot of real trading / HFT experience to be able to come up with it </li></ul></ul><ul><ul><li>An Exchange Simulator must be really flexible in terms of its model </li></ul></ul><ul><ul><li>Dark/Hidden Liquidity Markets are impossible to analyze and predict </li></ul></ul><ul><ul><li>The Development of such a system requires a tremendous effort in terms of development and financial math resources and costs a lot; and anyway is far worse than the real market in terms of the development of real Algos </li></ul></ul>
  14. 14. The Shortcomings of Using Exchange Simulators, Market Simulation <ul><li>Real life example: the Exactpro Exchange Simulator </li></ul>
  15. 15. The Shortcomings of Using Exchange Simulators, Market Simulation <ul><ul><li>Exchange Simulator Design: </li></ul></ul><ul><ul><ul><li>  Order Book exactly replicating all exchange rules </li></ul></ul></ul><ul><ul><ul><ul><li>This is already a challenge – real life example </li></ul></ul></ul></ul><ul><ul><ul><li>Trading Systems connect to the simulator as if they are connecting to the real exchange (both for OE and MD) </li></ul></ul></ul><ul><ul><ul><ul><li>Need to support adequate load generated by Trading Algos </li></ul></ul></ul></ul><ul><ul><ul><li>Market Model is implemented in three instances: </li></ul></ul></ul><ul><ul><ul><ul><li>The system is fed with historical orders recreating historical order books  </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A bunch of competing strategies representing the real market </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Counter flow model constantly monitors the liquidity on the book and generates artificial events to simulate market impact of orders generated by the Trading System under test </li></ul></ul></ul></ul>
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