Algorithmic Trading in Different Landscapes

© Copyright 2010-2014 QuantInsti Quantitative Learning Private Limited
Algorithmic Trading in different
geographies
- technologies
- regulations
- competition
- markets
Rajib Ranjan Borah
Market Microstructure, Liquidity and Automated Trading
Workshop.
Fitch Learning, London. 16-17 June 2014.
4th Annual Conference on ‘Behavioral Models and Sentiment Analysis Applied to
Finance’, London, 16-20 June 2014.

Agenda
Most relevant factors in analyzing different geographies
Current AlgoTrading landscape in various geographies
The road ahead ?
Q&A

Agenda
Relevant factors for analyzing different markets → Current landscape in different geographies → The future → QA
Most relevant factors in analyzing different geographies
Current AlgoTrading landscape in various geographies
The road ahead ?
Q&A

How do you decide: where to trade?
As a trading manager, how do you decide which geographies to trade ?

– Am I allowed to trade in that country (i.e. how conducive are regulations) ?
• Are foreigners allowed to trade ?
• Are there restrictions on position-sizing / short-selling ?
– Are these markets interesting to trade ?
• What are the listed instruments ?
• What is the volume traded ?
– Will I be able to make profits ?
• What is the level of sophistication of competition ?
• Who are the leading players ?
– What are the complexities to connecting to these markets ?
• Technological protocols used by these exchanges – common standard protocols OR unique
custom protocols
• Brokers to connect to these markets

– Am I allowed to trade in that country (i.e. how conducive are regulations) ?
• Are foreigners allowed to trade ?
• Are there restrictions on position-sizing / short-selling ?
– Are these markets interesting to trade ?
• What are the listed instruments ?
• What is the volume traded ?
– Will I be able to make profits ?
• What is the level of sophistication of competition ?
• Who are the leading players ?
– What are the complexities to connecting to these markets ?
• Technological protocols used by these exchanges – common standard protocols OR unique
custom protocols
• Brokers to connect to these markets
Regulations
Market Size
Competition
Technology

Algo trading in various landscapes

Equity volumes– avg monthly volumes (USD million)
Restricted Access
Please contact us at contact@quantinsti.com

Index FO – annual volumes (USD million)
Restricted Access

Equity FO – annual volumes (USD million)
Restricted Access

Currency – annual volumes (USD million)
Restricted Access

Interest Rate – annual volumes (USD million)
Restricted Access

ETF – annual volumes (USD million)
Restricted Access

Commodity– annual volumes (USD million)
Restricted Access

Automated Trading System components
Application
Order Manager
Market Data
Complex Event Processing
engine
Exchange
1
Storage
Application Server Exchange
Strategy
Settings
UI
State
Mgmt (PnL
+ Position)
Order /
Execution
Monitor
Within
application
RMS
Maths
Calc
RMS
Admin
Monitor
Exchange
2
F
I
X
F
I
X
Data
Normalizer
Order
Router
Back
office
record
MktData
Store
Event
History
Adaptor for
third party
apps – R,
Matlab, etc
Data
Retrieval
Data
Vendor
Replay
of stored
data
Simulator
exchange
To connect to any exchange, you need to build
(i) market data adaptor for that exchange’s protocol

Automated Trading System components
Application
Order Manager
Market Data
Complex Event Processing
engine
Exchange
1
Storage
Application Server Exchange
Strategy
Settings
UI
State
Mgmt (PnL
+ Position)
Order /
Execution
Monitor
Within
application
RMS
Maths
Calc
RMS
Admin
Monitor
Exchange
2
F
I
X
F
I
X
Data
Normalizer
Order
Router
Back
office
record
MktData
Store
Event
History
Adaptor for
third party
apps – R,
Matlab, etc
Data
Retrieval
Data
Vendor
Replay
of stored
data
Simulator
exchange
To connect to any exchange, you need to build
(ii) OMS adaptor to convey transaction information as per exchange protocol

Technology Protocols globally
One of the most popular protocol is FIX
Financial Information eXchange protocol
Data transferred as sequence of tag=value pairs
e.g.: 8=FIX.4.2 | 9=77 | 35=0 | 49=MCXSXTRADE | 56=xxxxx | 34=24
| 43=N | 52=20140607-05:14:05 | 112=DNLDCOMPLETE | 10=127
1 Account
2 AdvId
3 AdvRefID
4 AdvSide
5 AdvTransType
6 AvgPx
7 BeginSeqNo
8 BeginString
9 BodyLength
10 CheckSum
11 ClOrdID
12 Commission
13 CommType
14 CumQty
15 Currency
16 EndSeqNo
17 ExecID
18 ExecInst
19 ExecRefID
20 ExecTransType
21 HandlInst
22 IDSource
23 IOIid
24 IOIOthSvc (no longer used)
25 IOIQltyInd
26 IOIRefID
27 IOIShares
28 IOITransType
29 LastCapacity
30 LastMkt
31 LastPx
32 LastShares
33 LinesOfText
34 MsgSeqNum
35 MsgType
36 NewSeqNo
37 OrderID
38 OrderQty
39 OrdStatus
40 OrdType
41 OrigClOrdID
42 OrigTime
43 PossDupFlag
44 Price
45 RefSeqNum
46 RelatdSym
47 Rule80A(aka OrderCapacity)
48 SecurityID
49 SenderCompID
50 SenderSubID
51 SendingDate (no longer used)
52 SendingTime
53 Shares
54 Side
55 Symbol
56 TargetCompID
57 TargetSubID

Technology Protocols globally
Restricted Access

Country Regulation
European Union
(HFT = 39%)
MiFID II
FTT proposed (11 countries agreed to participate – Austria, Belgium, Estonia, France,
Germany, Greece, Italy, Portugal, Slovakia, Slovenia, Spain)
Germany (40%)
HFT firms to register with BaFin and obtain HFT licenses
Supervisors at BaFin and the Exchange Supervisory Authority are allowed to request
document all algorithms used - descriptions of trading strategies or parameters and are
permitted to deny the use of any
algorithmic trading strategy they believe is undesirable
appropriate order-to-trade ratio, to
develop a minimum tick size,
fee for excessive system usage, including
amendments and cancelations of orders, and it requires traders to flag each order
generated by an
algorithm
France
Non-Transaction tax of 0.01% (replace / cancel)exceeding 80% of all orders transmitted in
a month
Tax if orders modified or cancelled in less than 0.5 second
0.20% trasaction tax on purchased shares of companies with market cap > €1 billion
(France’s share of EU equity turnover dropped from 23% in 2011 to <13% in 2013)
Regulations

Country Regulation
USA
(48.5% in 2013.
61% in 2009)
Pre-‐trade controls; post-‐trade controls; system safeguards; mandatory registration and
reporting;
Standardized order types; testing of algorithms; documented evidence of capacity,
integrity, resiliency, availability, and security adequate to maintain operational capability;
scheduled testing; continuity and disaster recovery plans; system redundancy; financial
transaction Taxes
Proposed: Inclusive Property Act 0.5% sales tax on most financial instruments,. Wall
Street Trading and Speculators Tax Act: 0.03% tax on trading by financial institutions
Singapore 0.20% stamp duty on equity trading
Hong Kong (20%)
0.1 % stamp tax
HFT – detailed records and audit logs for at least 2 years. System testing once a year
China
Stamp duty between 0.1% to 0.3%
Complex rules wrt FII in China
Taiwan All orders to go through FMC
Regulations

Restricted Access
Please contact us at
contact@quantinsti.com

Shift in market volumes
Likely threat of introduction of a HFT tax (financial transaction tax),
+
Over crowding of US and European automated trading markets
Likely shift of volumes towards Asian, LatAm
(increasing number of global firms setting up shop in India, Singapore, Hong Kong,
Brazil, etc)
↓

Growth of market segments
Regulations in certain markets are going to introduce new destinations
for algorithmic traders:
• Swaps traded electronically in SEFs instead of OTC
– Post Dodd-Frank Wall Street Reform and Consumer Protection Act, four
categories of interest rate swaps and two categories of credit default swaps
are going to be listed on SEFs (Swap Execution Facilities)

Technology Simplification/Consolidation
Different exchanges shifting to standardized technology protocols
instead of maintaining proprietary protocols
(Bombay Stock Exchange in India adopting Eurex Platform.
Budapest, Bursa Malaysia adopting CME Globex
Multiple developing economy exchanges like Bursa Istanbul adopting FIX protocol)

Technology Arms race no more ?
In a lot of aspects, we are reaching the limits of technology
+
The cost of technology is also coming down
↓
Therefore technology might no longer be the sole asset of privileged
market participants
↓
Trading Alpha will again shift towards statistical excellence rather than
technological upper-hand

Copyright © 2014 by QuantInsti Quantitative Learning Private Limited.
Although great care has been taken to ensure accuracy of the information
in this presentation – however the author (and QuantInsti) accepts no
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provided.
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This document provides an outline of a presentation and is incomplete
without the accompanying oral commentary and discussion.
Disclaimer

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