Is HFT Ready to Take Over the World?
The new rules - DMA models 2, 3 and 4 - address sponsored access for the equities market, allowing high-frequency traders to access low-latency markets without pre-execution controls. Other new regulations allow colocation and the connecting of networks. While these offerings already were in place for the futures market, Brazil's regulator now has made them available for the equities market, too.
"You have to have the regulatory structure right to do electronic trading," notes Adam Honore, research director at Boston-based Aite Group. "You don't want to have to trade through a local broker. If exchanges have delays on quotes or orders, like some Asian exchanges, they're not going to be suitable for electronic trading."
Many emerging markets - including Singapore and, to some extent, Korea - still require regulatory changes to support the expansion of electronic trading, according to Honore. But, with the exception of Brazil, "There's more interest from the non-emerging world for the emerging world to have an open market than there is in the emerging market itself," he says.
For example, traders in developed markets are increasingly interested in Vietnam and Thailand, Honore notes. "But there's nothing coming out of there itself. The appetite is bigger than the bite," he says.
Accelerating Exchange Infrastructure
In addition to operating under a regulatory structure that is flexible enough to enable emerging markets to compete in the global marketplace, exchanges themselves must have "their infrastructure right," Honore adds. Exchanges that recently upgraded their infrastructure include the Tokyo Stock Exchange (TSE), the Warsaw Stock Exchange and the Singapore Exchange (SGX).
Earlier this year the TSE launched its next-generation equities trading system, "arrowhead," with the aim of boosting order capacity and reducing latency. This summer, the Warsaw Stock Exchange signed a deal with NYSE to acquire a state-of-the-art cash and derivatives trading platform provided by NYSE Technologies as part of a multiyear business partnership. And the SGX recently announced a collaboration with Voltaire, a provider of scale-out data center fabrics; Nasdaq OMX; and HP on an ultra-fast, next-generation equities trading platform.
Singapore's new trading engine - SGX Reach - will launch in the first quarter of 2011. It will be delivered through Nasdaq OMX's Genium INET technology, Voltaire InfiniBand switches and the vendor's Messaging Accelerator software, and HP ProLiant server blades. In a benchmark test, the exchange reportedly achieved an average order response time of less than 90 microseconds door to door, providing customers with the fastest execution capability in the world, according to Voltaire. In addition to SGX Reach, the exchange's new data center also will house SGX's market data and clearing infrastructure and offer a wide range of colocation services, the Singapore Business Review reports.
Meanwhile, India also has been actively focusing on boosting its low-latency capabilities. Since fall 2009, for example, firms have been able to colocate at the National Stock Exchange of India (NSE). (Colocation is not yet available at the commodities exchange, NTX.)
When NSE opened its colocation facility in January, initially it included space for 50 brokers, relates Sanjay Das, CTO and founder of Symphony FinTech, a start-up venture based in Mumbai and Edison, N.J., that seeks to design and deploy the next generation of high-frequency algorithmic trading platforms for the buy and sell sides in India. "That space was sold out within one week," he recalls. "Since it was sold out so quickly, they opened a second space in March of this year, with space for 200 computers. A lot of domestic brokerage houses got in." (Deutsche Bank, Citi, Morgan Stanley, Goldman Sachs and MF Global reportedly have colocated machines at the NSE.)
Local brokerages trade mostly through their own prop desks, usually deploying arbitrage strategies, Das says. "But the kind of trading strategies used by players right now will change," he asserts. "The buy side isn't there now - they will demand space in a colocation facility. So we're looking at the tip of the iceberg."