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Larry tabb hft tools - part 2


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Larry Tabb

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Larry tabb hft tools - part 2

  1. 1. High Frequency Trading Tools and Technologies Presented by Larry Tabb (Founder & CEO)
  2. 2. Agenda <ul><li>To the winners go the spoils </li></ul><ul><li>Buy-side needs multiple tools </li></ul><ul><li>Tools </li></ul><ul><ul><li>Dark pools </li></ul></ul><ul><ul><li>Flash </li></ul></ul><ul><ul><li>Sponsored access </li></ul></ul><ul><li>Technologies </li></ul>
  3. 3. Different trades need different tools Immediacy Size Low Impact (size) 1) Blocks/Dark pools 2) Dark Algorithms Quiet Accumulation 1) Dark / Opportunistic Algorithms 2) Blocks/Dark pools 3) Broker Capital <ul><li>Delegation </li></ul><ul><li>VWAP/Implementation Shortfall Algorithms </li></ul><ul><li>2) Direct Market Access </li></ul>Need it, want it, got to have it 1) Direct Market Access 2) Accumulation Algorithms 3) Broker Capital Source: TABB Group
  4. 4. Dark pools are steadily gaining market share in both the US and Europe No. of Dark Venues Source: TABB Group Estimate 18 27 32 45 52 53 3 4 9 21 29 36 1.5% 4% 7% 7.5% 12.5% 1% 2% 2% 3% 5% 10% 11.5% 2005 2006 2007 2008 2009 2010 US Europe % Traded Volume (dark)
  5. 5. When trading at the exchange, you are competing against the marketplace Buy-side/ Investors/ Liquidity takers Brokers, Buy-side, Prop, and Other Bidders for Liquidity Source: TABB Group 1 of 9 National Exchange Broker
  6. 6. In a dark pool, you get first look, and generally better than market pricing Broker Brokers, Buy-side, Prop, and Other Bidders for Liquidity Broker Dark Pool Buy-side/ Investors/ Liquidity takers Source: TABB Group National Exchange Broker 1 of 9 1 of 1
  7. 7. HFT Tools <ul><li>Co-lo </li></ul><ul><ul><li>Being first is everything </li></ul></ul><ul><li>Low latency connectivity </li></ul><ul><ul><li>Fiber and networking </li></ul></ul><ul><li>Market Data infrastructure </li></ul><ul><ul><li>Direct feeds </li></ul></ul><ul><li>CEP </li></ul><ul><li>Models </li></ul><ul><li>Execution engine </li></ul><ul><li>Risk modeling </li></ul>
  8. 8. Flash orders – a second chance to match orders before they are routed Exchange w/ Best Price Exchange w/o Best Price Market Maker Liquidity Provider Market Maker Liquidity Provider Sell <ul><li>Retail Order Execution Using Flash Order </li></ul><ul><li>Retail order comes into broker </li></ul><ul><li>Broker routes order to ECN/Exchange using “Flash Order” </li></ul><ul><li>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 </li></ul><ul><li>Since the ECN/ Exchange doesn’t have best price it flashes order to market markers/liquidity providers (typical time .02 to .05 seconds) </li></ul><ul><li>If MM/LP wants the order it either needs to match or better bid </li></ul><ul><li>If not – order must be routed to exchange showing best price </li></ul><ul><li>Typical flash order is free – typical charge to route order to another ECN/Exchange is 25 to 30 cents per 100 shares </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>Retail Investor Retail Broker Sell Not best bid Best bid Will match or better bid? Yes / Trade No / No Trade Free Execution 25 to 30cents/100 Shares Problem is if MM/LP executes against the better price and/or changes quote
  9. 9. Sponsored access provides thin gateway veneer between client and exchange <ul><li>Sponsored access allows brokers & other trading firms to trade directly on an exchange using the access broker’s credentials </li></ul><ul><ul><li>Mostly for liquidity providers / high frequency traders </li></ul></ul><ul><li>Issues are </li></ul><ul><ul><li>Risk management – order goes to the exchange before broker sees it </li></ul></ul><ul><ul><ul><li>If they fat finger an order or the trading model goes errant then the broker is on the hook </li></ul></ul></ul><ul><ul><ul><ul><li>Firms are developing technology to mange this </li></ul></ul></ul></ul><ul><ul><li>Equal access </li></ul></ul><ul><ul><ul><li>Easier to co-lo / obtain sponsored access than ever before </li></ul></ul></ul><ul><ul><li>Better understanding of liquidity in exchanges vs. dark pools </li></ul></ul><ul><ul><ul><li>Exchanges have open access – dark pools don’t </li></ul></ul></ul><ul><ul><ul><li>Brokers & dark pools usually get order flow before exchanges </li></ul></ul></ul><ul><ul><ul><li>Dark pool order flow is more protected than exchange liquidity </li></ul></ul></ul><ul><ul><ul><ul><li>Otherwise execution quality would be worse, and </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Institutional investors would shun dark pools like the plague </li></ul></ul></ul></ul>
  10. 10. While all orders need to be represented by a broker they don’t need to go through brokers pipes Investor Broker Matching Venue Order Order Execution Execution Traditional Access Market Maker Liquidity Provider Broker Matching Venue Order Execution Execution Sponsored Access
  11. 11. Sponsored access benefit is exchange execution speed which does not necessarily mean access to best orders Investor Broker Exchange Orders Traditional Access Benefit Unique Liquidity from Other Customers Investor Investor Investor ECNs Dark Pool First Second Market Maker Liquidity Provider Broker Matching Venue Order Execution Execution Sponsored Access Benefit Speed to External Matching Venues
  12. 12. Dark pools generally get access to best order flow – which is hard for sponsored access firms to get access to Sponsored Access Challenges Broker Market Maker Liquidity Provider Matching Venue Co-lo Facility Investor Dark Pool Broker Data Center Matching Venue Fast Not as fast Sponsored Access Challenge While access to co-loed matching engine is quick, significant volume (and better liquidity) comes through brokers (institutional and retail orders). Traditional Access Benefit Unique Liquidity Comes from Customers Order Flow Investor Exchange Orders Investor Investor Investor ECNs Broker Dark Pool Second First Traditional (Better) Liquidity hits Brokers First The majority of orders come through brokers first. As such they first match in broker crossing networks & dealers’ dark pools – unless prop shops also co-lo or have high speed access to dealer dark pools
  13. 13. The amount of data that needs to be processed is astronomical 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 – August 13, 2009
  14. 14. High Frequency Trading The Tools and Technologies Presented by Larry Tabb (Founder & CEO)