ON THE MONITOR
Techniques and Technology Traders Use to Deal With Fragmentation
November 22, 2009
In today’s speed-of-light buying and selling, coping with the proliferating number of venues has become a priority of both trading desks and the technology providers arming clients with the latest tools to find the best price in increasingly fragmented markets for shares.
Waves of fragmentation have come and gone since the late 1990s when electronic communications networks (ECNs) debuted, “but at the end of the day its' all about technology and how you functionally re-aggregate the market by being able to access as many pools of liquidity as possible, and be able to intelligently seek out that liquidity that others might be missing,” said Steve Swanson, global co-head of electronic trading in equities at Citigroup.
With Regulation National Market System (NMS), making sure your trading firm has a strong order management system (OMS) is necessary to comply with the regulation’s requirement that the client gets the best available price, after high-speed comparison shopping, said Robert Moore, managing director of institutional broker Concept Capital.
“If you have the right technology and the right smart order routers, you can keep up with where order flow is trading and where the liquidity is and what needs to be done,” said Moore.
Concept utilizes several third-party order management systems from multiple leading providers, said Moore, explaining that the firm uses several different systems to “meet the needs of various clients on the sell side and buy side, as well as direct traders.” He declined to name the providers.
“We have access to multiple algorithms and, of course, those algorithms go out to various dark pools,” said Moore. "We’re going to rely on our smart order router to find the best price for our clients as opposed to entering orders into a single dark pool.
“It is our belief,’’ he says, “that this is doing a disservice to the institutional client order flow. A vast number of users of the dark pools are entering orders into the various pools because they have a monetary investment in that pool."
In order to better cope with market fragmentation and better manage their order flow, institutional broker Cuttone & Co. uses routing tables to determine which markets get tapped in what sequence, said Frederick Scuteri, senior vice president of prime brokerage services at Cuttone.
“[Routing tables] allows us to create a roadmap for an order in terms of where we want it to go out and seek liquidity,” said Scuteri, noting that the technology was developed with a firm in Jersey City, N.J. he declined to name.
With a routing table, Cuttone can select the ECNs and ATSs and dark pools it wants to interact with. “It’s order optimization,” said Scuteri. “It shows us where the pockets of liquidity are and helps us avoid those venues where we don’t get a great fill rate [percentage of orders that are sent to a pool that get executed]. It provides some good color as to where you could be successful going forward in terms of execution.”
Dhiren Rawal, U.S. managing director of Quod Financial, a provider of multi-asset and cross-asset adaptive execution technology said that when he talks to clients, the basic question is, “can I see everything out there that I need to be able to see, am I getting the quality of the fills I should be getting?”
“Technology has to be adaptive enough to address that changing liquidity dynamic,” said Rawal. “Now it’s much more important to understand whether the quality of execution at that venue is the right level, whether the costs are the right level, whether there’s depth of liquidity there, as opposed to just price.”
Josef Schroeter, president of CQG, a trade execution, market data and advanced analytics provider for global electronically-traded cash and futures markets, noted that “just like everyone else we have found that the hosted direct market access (DMA) model is now accepted because with fragmentation, traders are demanding inter-connectedness” with other trading desks and all liquidity pools.
The biggest fallout may be the fact that it has become cost-prohibitive for a firm whose expertise is not technology and connectivity to continue to try to connect to all of these different markets themselves, especially as electronic trading starts to go global, said Schroeter.
The more markets that emerge and the greater the imperative to pull together prices from each the tougher it gets to be technically efficient., adding that one of the things traders are constantly demanding are lower execution costs. “As markets get fragmented the traders are trying to spread across exchanges and that's where the latency demand comes from,’’ Schroeter said.
And it can be tough for to keep execution costs down, which is why a sprawling business in specialty communications providers such as CFN Services has sprung up, who use fiber to create custom networks between venues and provide “lowest latency networks” for trading.
The aim is to interconnect markets in the most efficient and low-cost manner for trader firms.
But overall, reliance on and spending on technology is going up.
“The unintended effect is the greatly increasing cost of technology because you have to pay for technology to deal with the fragmentation,” said David Polen, senior vice president of hosted product marketing at trading technology provider Fidessa. “So your cost of execution may have gone down but your cost of technology has gone up.”
THE WEEK AHEAD:
MONDAY, NOVEMBER 23
EVENT: TradeTech Liquidity 2009
Tower Quoman, London
SPEECH: Robert S. Khuzami, S.E.C. Enforcement Chief
“Hedge Fund Enforcement & Regulatory Developments 2009” Practicing Law Institute, 810 Seventh Avenue, Floor 31, New York, NY 9:15 a.m.
WEDNESDAY, NOVEMBER 25
WEBINAR: The Real Truth About Cloud, SaaS
Gartner Research Vice President Robert P. Desisto 9 a.m. Eastern
THURSDAY, NOVEMBER 26
All U.S. exchanges closed.
FRIDAY, NOVEMBER 27
EARLY CLOSE: New York Stock Exchange trading floor closes at 1 p.m.
Crossing Session I order entry will begin at 1:15 p.m. with order executions at 1:30 p.m. Crossing Sessions II orders will be accepted beginning at 1:00 p.m. for continuous executions until 1:30 p.m. on these dates.
EARLY CLOSE: NASDAQ market closes at 1 p.m.
Narrow-Based Equity Options close at 1:00 p.m. World Currency Options close at 1:00 p.m. Broad Based Index Options close at 1:15 p.m.
THE WEEK THAT WAS:
Tradeweb Takes on Icap in Inter-Dealer Agency Bond Trading
EC Charges S&P With Monopoly Abuse
UNX Appoints Thomas Kim as CEO and Secures Funding for Strategic Growth
Fixnetix Partners With Latency Management Provider Corvil
Gray Areas Remain in SEC's Dark Pool Proposa
Paulson Takes Citigroup Stake, Sells Goldman Sachs Shares
JPMorgan to buy out UK brokerage
Finra Enforcement Division Focuses On Efficiencies
