High-frequency trading is high on the agenda of the Securities and Exchange Commission (SEC) and two recently proposed rule changes could lead to a boon for technology providers. However, industry insiders caution that the SEC must be careful not to leak any intellectual property data it may gather from its increased surveillance of high frequency traders.
Note: This topic will be discussed at A-Team Insight Exchange on Monday, April 26th in NYC as part of a panel session including executives from Lime Brokerage, NYSE Technologies, Infinera, Colt and Cisco Systems.
While intended to shine more light on high frequency trading, the US regulator’s proposed actions could serve as a catalyst for broker/dealers to refresh their infrastructures for high-speed sponsored access. The SEC proposed in mid-April that large traders be assigned unique identifiers and be required to provide next-day transaction data to regulators when they ask for it.
In addition, earlier this year, the SEC proposed a ban on so-called “naked” sponsored access to trading exchanges via broker-dealers. The US regulator wants clients to be protected through pre-trade controls in an effort to reduce risk especially for low-latency, fast transactions.
At A-Team Insight Exchange, a panel on “Low-Latency Architectures for DMA and High Frequency Trading” will feature Andrew Delaney, president and editor-in-chief of A-Team Group as moderator; Chris Liou, vice president, Network Strategy, Infinera; Dan Bergman, vice president, High Performance Engineering, Lime Brokerage; Nicolas De Vanssay, Operations Director, Colt Internet US Corp; Dave Malik, Director, Solutions Architecture, Cisco Systems; and Dan Romanelli, Managing Director, Managed Transactions, NYSE Technologies.
If the large trader identifier/data collection rule comes into effect, it may level the playing field among sponsored participants “by defining what precisely is required of them with respect to pre-trade risk controls,” says A-Team Group’s Delaney. “This move places the onus on sponsoring brokers to better understand the trading activity of their clients, thereby creating a clearer view of the risks clients may be exposing them to.”
The SEC’s proposed action will likely cause brokers to bolster their infrastructures, which is good news for technology suppliers.
“The SEC and other regulators globally have stated that they expect brokers to incur significant expense in implementing the kinds of risk management systems required, particularly as brokers seek to protect their clients’ latency advantages,” Delaney says. “So, for suppliers of appropriate solutions, the opportunity could be significant.”
The outcome of the SEC’s proposal to require trading firms to report next-day transaction data to regulators is not as clear.
“As with all such moves, the question is whether the regulators have the resource or will to do something with this data,” Delaney says. “On paper, it may put some minds at ease; in practice, it may have little impact.”
The potential of a new data tagging requirement does not come as a great surprise to Jeffrey Wecker, president and CEO of Lime Brokerage. “Any request to tag order flow or a subset of that order flow as requested by the SEC is no different than what regulated broker/dealers such as Lime Brokerage already do today,” Wecker says. “We do not see a problem with this as long as the information is used for the purpose of regulating that flow and/or with educating the SEC on what’s occurring in the marketplace.” Wecker has one caveat, though. “What we do have issue with, however, is any disclosure beyond the SEC, for any reason, and the leaking of specific customer intellectual property for the benefit of any third party,” he says.
Naked No More?
As for the potential end of “naked” sponsored access, Lime has always considered the lack of pre-trade validation to be a bad idea, says Bergman. In addition, Bergman says the practice of using “drop copies” to review trades shortly after they’ve been transacted is far from foolproof.
“In the absence of pre-trade validation all you can do is look at the drop copy after the fact,” Bergman says. “Given the rate at which some of these hedge funds trade, you could have created a great deal of exposure well before it’s caught.” Bergman adds that pre-trade validation enables broker/dealers and clients key methods to check for errors, and “for whether the client is allowed to place the trade as well as algorithms that might have run astray—all in advance of hitting the markets. It’s hard in a drop copy scenario to ever really catch those things in time. Those drop copy scenarios can only really catch up in milliseconds to seconds after the trades and, at that point, it could be late.”
To help firms with pre-trade validation, Lime has adapted its InLine risk management trading server “for co-location opportunities” to create LimeInside, which was introduced in March, Bergman says. The proposed SEC ban could “enhance the traffic flow through our trading servers,” Bergman adds. “If a certain percentage of volume that has gone naked in the past is now going to have to go through a broker/dealer to get trade validations and checks done before hitting the market, then we are hopeful and pretty confident that we are going to get some percentage of that flow.”
Multi-asset trading, of course, is a beneficiary of the high-frequency trading phenomenon. “More and more of our customers are using underlying strategies that include the options markets,” says Lawrence Hansen, director of product management, market data at Lime.
To facilitate ultra high-speed options market signaling, earlier this year Lime soft launched its ultra-low latency options market data service through its real-time proprietary quote delivery system Citrius, Hansen says.
A full launch is expected on April 30 when all of the available options feeds will be ready for eligible customers. Already a U.S. equities market data supplier, Lime will be redistributing OPRA data and datafeeds for the BOX, CBOE, ISE, Nasdaq, NYSE, AMEX, NYSE ARCA, PHLX (Nasdaq) and the BATS venues.
Fat fingers and Credit Checks
NYSE Technologies’ pre-trade validation via the hosted Risk Management Gateway solution “matches the letter and intent of the SEC proposal,” Romanelli says. The gateway, which offers sponsor-directed fat finger and credit checks, can be located in a NYSE data center or deployed to remote data centres.
“We look for this to be a hosted solution meaning there’s no equipment build or capital expenditure on the client side or the sponsoring broker side. It’s a service that’s available and reachable via the SFTI network,” says Romanelli. “But we responded to client demand to expand the destinations.”
Originally designed to provide members with filters to the NYSE, RMG now extends to brokers and Alternative Trading Systems beyond the National Market System venues. The large firm identifier/data collection proposal might require additional tags in the messaging, which will have a minimal effect upon RMG, Romanelli says.
“We looked at our system and, if the SEC system is tag based, RMG would simply pass those tags along,” he says. “We would also respond to client demand and allow brokers to see those types of tags in the monitoring tools.” If the large firm identifier rule is implemented, NYSE Technologies may offer an additional report service and “a couple of value-added services to allow brokers to respond,” Romanelli says.
Aside from the SEC’s actions, the push for low-latency has spurred Infinera, a supplier of digital optical networking systems to telecommunications carriers, to unveil a low-latency solution set targeted at service providers and enterprises. The solutions are intended to help with end-to-end optical transport network requirements in metropolitan area network (MAN) and wide area network (WAN) environments.
A key Infinera customer, the London-based Colt Technology Services, which offers pan-European networking services, has introduced a range of services to support the Colt Fastnet Ultra offering, including transport over the Infinera-based low-latency network, which Colt said it intends to expand during the next quarter.
Infinera’s Liou and Colt’s de Vanssay will be on hand at the A-Team Group conference and exhibit to discuss the technologies and services that deliver low-latency networks.
Networking giant Cisco has also targeted the high-frequency market and offers the Cisco Algo Speed: High Frequency Trading (HFT) solution, part of the Cisco High-Performance Trading (HPT) portfolio. Some of the Cisco HPT solutions include Cisco Nexus 5000 and 2000 Series switches for low-latency support, the Cisco Catalyst 4900M switch for Gigabit Ethernet and 10 Gigabit Ethernet environments. Cisco also works with partners such as 29West-Informatica and its Latency Busters Messaging (LBM) middleware, and Thomson Reuters, which sells the RMDS platform.