EXTENT February 2011 Presentation Exactpro Systems LLC

1. Liquidity Fragmentation & SOR
Iosif Itkin
EXTENT February 2011

2. Contents
MIFID - The Markets in Financial Instruments Directive is a European Union law that provides harmonised
regulation for investment services across the 30 member states of the European Economic Area (the 27
Member States of the European Union plus Iceland, Norway and Liechtenstein)
MTF - Multilateral Trading Facility
FFI – Fidessa Fragmentation Index
Best Execution - refers to the obligation of an investment services firm (such as a stock broker) executing
orders on behalf of customers to ensure that the prices those orders receive reflect the optimal mix of price
improvement, speed and likelihood of execution
SOR - Smart Order Router

3. Technology & Regulations
Newswire and information source for the worldwide financial technology community:
http://www.finextra.com

4. Technology & Regulations
Financial Times videos: http://video.ft.com/ft-trading-room

5. FTSE 250 Market Share
Source: http://www.batstrading.co.uk/market_data/market_share/index/

6. FTSE 250 Market Share (MTFs)
Source: http://www.batstrading.co.uk/market_data/market_share/index/

7. Fidessa Fragmentation Index
Source: http://fragmentation.fidessa.com

8. Fidessa Fragmentation Index
Source: http://fragmentation.fidessa.com
N – Number of Execution Venues, Mi - Market Share of Execution Venue
FFI shows the average number of venues you should visit in order to achieve best execution when completing
an order.
a) Assuming Mi = 1/N
b) Assuming Mi = x, Mo = 1-x and N=2

9. Fidessa Fragmentation Index
Source: http://fragmentation.fidessa.com

10. Testing Trading Systems
Quality and stability of algorithmic trading systems become a crucial factor in
the current trading landscape.
Three aspects of advanced execution systems quality:
• Functional correctness
• Technical – performance, latency, resilience
• Business efficiency
Two dimensions to their complexity:
• Technological: complex algorithms relying on historic and real-time market
data and dynamically changing decisions, might include non-deterministic
behavior;
• Organizational: frequent system upgrades, multiple instances of algorithms
running simultaneously.
Behavior in production is key, but a robust testing procedure using simulators
provides additional confidence in the results and even helps to interpret some
production observations.

11. Smart Order Routers Testing

12. Testing Principles
• Scheduled tests vs. test markets during business hours
• Scheduled tests vs. simulation frameworks are constantly running
• Treat the test farm as a Production system
• Reflect the latest Production observations in the test suites
• Systems require careful data maintenance
• Ensure precision and correctness of latency measurements
• Due to stochastic behavior the same tests are repeated multiple times

13. Complex Smart Order Router
Treat the Test Farm as
a Production System

14. 1. Testing Principles
Scheduled Tests vs.
Test Markets during
Business Hours

15. 2. Testing Principles
Scheduled Tests vs.
Simulation Frameworks
are Constantly Running

16. 3. Testing Principles
Treat the Test Farm as
a Production System

17. 3. Testing Principles
Treat the Test Farm as
a Production System

18. 4. Testing Principles
Reflect the Latest
Production
Observation in the
Test Suites

19. 5. Testing Principles
Systems Require
Careful Data
Maintenance

20. 6. Testing Principles
Ensure Precision and
Correctness of Latency
Measurements

21. 7. Testing Principles
Due to Stochastic
Behaviour the Same
Tests are Repeated
Multiple Times

22. Questions & Answers
Thank you.