© 2014 Khaled A.B. Aly, Technopsis.com®
Capital market stake holders; including exchanges, brokerages, individual and institutional investors, third party round-the-clock exchange service providers, and market data aggregators/providers; have entered a race to expedite trade data round-trip latency. This race is driven by the fact that trading has become algorithmic and that the algorithms may place buy and sell orders at (sub) millisecond frequency, or higher. Hence traders compete to obtain fresher market data and to make out accordingly better qualified trade (buy and sell) orders. And accordingly all the other entities that support traders are leveling to meet their customers’ merits.
Major exchanges conventionally built their own proprietary hardware trading platforms and ticker plants and have established provisions to enable low-latency processing of high frequency orders and market data dissemination. Investors, on the other hand, run less of ‘template’ operations since the algorithms, software architecture, and hardware platforms widely vary according to trade frequency, type of securities being traded, target markets, risk management policy, and many other factors.
It is no longer that non-institutional investors are only the quantitative floor traders making trade decisions based on quick spreadsheet calculations at the portable PCs they carry. Algorithmic trading professionals build their own platforms and run incorporated trade operations, globally. Since HFT servers are typically collocated within the target exchange(s) data center(s) for sake of eliminating WAN latency, the corporate investors operate from anywhere--remotely managing their platforms.
HFT has higher viability in high liquidity markets and instruments. FOREX, ETFs (Electronically Traded Funds) and derivatives are among the instruments dealt most in HFT. The fact that HFT works best in high liquidity markets, coupled with recent financial crises (e.g. crash of 2008) and the proliferation of several prominent Asian currencies, drove the attention of GCC capital market participants to prepare for HFT.
HFT traders may not be a majority by number. However, by virtue of their trade frequency, their traded securities are majority by volume. In the US, HFT accounts for over 70% of equity trade volume. While HFT firms represent 2% of the approximately 20,000 firms operating today, they do account for 73% of all equity orders volume.
Abu Dhabi based brokerage, ADS Securities, has recently invested tens of millions of dollars over two years to develop its proprietary multi-asset trading platform. Called OREX Optim, the region’s pioneering trade platform has been built with HFT in mind to support the particularly lucrative FX market. With over 60 currency pairs, ADS Securities believe that the particular proximity to Indian and Chinese markets enhance the business case, especially with the Chinese Yuan becoming an alternative reserve currency. “The financial strength of companies in the Middle East means we can get good access to liquidity which can then be passed on to clients,” said Philippe Ghanem, ADS Securities Managing Director and Vice Chairman in an interview with Gulf News.
Kuwait based “Al-Moadala Capital Technologies” is another HFT pioneer in the GCC region that offers investment solutions mainly focused on algorithmic strategies; and working to develop the HFT market in the region’s main seven national exchanges and other relevant trade entities. As a model provider, Al-Moadala offers advanced neural network, genetic algorithm, momentum, trend following, mean reversion, and pairs trading models. Their “Implementable Models” business segment is solely concerned with HFT. Mainly relying on statistical arbitrage executing FX pairs or more complex basket trades, target clientele include traders and brokers who operate exchange collocated servers, who manage million Dollar ++ assets, and who wish to make steady (25%+) returns at minimal risk.
There are other serious omens of a growing attention to the potential HFT market in the region. Saudi Arabia’s stock exchange – Tadawul – is replacing its trading engine with NASDAQ-OMX’s proprietary X-Stream platform, which specially supports HFT. Bahrain Bourse and Iraq Stock Exchange have taken similar steps, implementing proprietary X-Stream.
NASDAQ is a New York based stock exchange and is the second largest stock exchange in the world by market capitalization, next to the New York Stock Exchange. NASDAQ Dubai is owned by Borse Dubai holding company, which was created in 2007 to consolidate the two Dubai stock exchanges, and to expand Dubai’s investments in other exchanges (secured 28% of LSE), with the purpose of establishing Dubai as a global capital market hub.
The exchange platform is owned by NASDAQ- OMX Group, which is a merger of NASDAQ and Swedo-Finish OMX AB that operates eight exchanges in Nordic and Baltic states. X-stream trading platform, the most widely used exchange trading system in the world (22+ deployments), is an exceptional multi-asset, high-performance, low-latency, system with sophisticated risk management and third party hosting services. It features an extensive plugin library covering up to 300 functions, and over 60 algorithms and processes; it sustains order rates of over 40,000 orders per second with sub-40 microsecond latency; it includes a purpose built FIX gateway for market places that promotes efficiency and interoperability; and it supports HFT connectivity via ITCH and OUTCH, the incoming market data communication and outgoing order placement communication protocols, respectively.