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Liquidity Fragmentation & SOR

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EXTENT February 2011 Presentation
Exactpro Systems LLC

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Liquidity Fragmentation & SOR

  1. 1. Liquidity Fragmentation & SORIosif ItkinEXTENT February 2011
  2. 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. 3. Technology & Regulations Newswire and information source for the worldwide financial technology community: http://www.finextra.com
  4. 4. Technology & Regulations Financial Times videos: http://video.ft.com/ft-trading-room
  5. 5. FTSE 250 Market Share Source: http://www.batstrading.co.uk/market_data/market_share/index/
  6. 6. FTSE 250 Market Share (MTFs) Source: http://www.batstrading.co.uk/market_data/market_share/index/
  7. 7. Fidessa Fragmentation Index Source: http://fragmentation.fidessa.com
  8. 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. 9. Fidessa Fragmentation Index Source: http://fragmentation.fidessa.com
  10. 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. 11. Smart Order Routers Testing
  12. 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. 13. Complex Smart Order RouterTreat the Test Farm asa Production System
  14. 14. 1. Testing PrinciplesScheduled Tests vs.Test Markets duringBusiness Hours
  15. 15. 2. Testing PrinciplesScheduled Tests vs.Simulation Frameworksare Constantly Running
  16. 16. 3. Testing PrinciplesTreat the Test Farm asa Production System
  17. 17. 3. Testing PrinciplesTreat the Test Farm asa Production System
  18. 18. 4. Testing PrinciplesReflect the LatestProductionObservation in theTest Suites
  19. 19. 5. Testing PrinciplesSystems RequireCareful DataMaintenance
  20. 20. 6. Testing PrinciplesEnsure Precision andCorrectness of LatencyMeasurements
  21. 21. 7. Testing PrinciplesDue to StochasticBehaviour the SameTests are RepeatedMultiple Times
  22. 22. Questions & Answers Thank you.