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WFE MIT ForumComparisons of ATS systems with those of traditional

Stock Exchanges

Trading TechnologyNovember 2009

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AGENDA

• The new exchange participants• Architectural Differences• ATS system architecture• Challenges to the industry

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1. The participants

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Industry Trends – exchange participants

• Global brokers• Simple connections, FIX• Routing networks• Co-location• Cheapness• Product expansion

• Commodities, Derivative, ETFs.• Local Brokers

• No changes• Cost reduction • Simplicity

• Algo Traders:• Cheap • Fast• High volume/low latency • Co-location• Simple market structures• Out of hours trading• Not afraid of technology!

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Industry Trends – effect on execution centres

• In 2003 trend was• BCR centric – resilience and recovery key• High degree of functionality – derivatives, ETFs etc• Multi-asset/functionality systems• Scalability – Moore’s law kept up with increase in business

• In 2009 trend is• Low latency• Performance• High order to trade ratio• Competitive costs – low overheads

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1. Architectural differences

Industry Trends – Architectural Types

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• TT has identified four major types of architecture for exchange trading systems.

Type1. Mainframe/minicomputer centralised trading system2. Distributed multi-server resilient system3. Simple (simplex) trading system with few or no

resiliency components4. Web/windows component systems

• These are generally in order of chronological development• There is no judgment as to which is better or worse• The packages such as CLICK, X-STREAM and SAXESS are type

2• The ATSs tend to be a type 3, which has emerged as the

highest performance system due to its simplicity

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Typical “Type 2” system architecture

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Typical ATS system architecture

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Speed = simplicity...

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Industry Trends – Trading systems

• ATS model – simple systems• Designed for speed first, resiliency

second• Sacrifice resiliency components for speed• Reliant on more stable platforms

• HP x86 Blade servers• Clustering• Disk RAID/SAN resiliency

• Use of Multicast core to architecture• Use of native protocols plus ITCH OUCH• Standardised on

• C++, • RedHat Linux, • Open source components, • MYSQL or Oracle

• Offer Co-location

Matching Engine

Matching Engine

Matching Engine

Matching Engine

marketdata

disseminationmodule

Marketdata GW

Marketdata GW

Marketdata GW

Member FIXGW

Member FIXGW

Member FIXGW

Member FIXGW

STL

ApplicationLogging

FIX

PITCH

Market Data from other markets

Trading system latency

• Note these are “published” latency figures • Beware lies, damned lies and Exchange statistics!• Beware also that all technology providers will claim sub nano-second latency...• ASX is spending money on upgrading ITS• BATS and Chi-X will not be standing still on latency• Will Latency matter once all venues are under 1ms?

0.0

5.0

10.0

15.0

20.0

25.0

Equity Trading System Latency (ms) - 2009

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6. Effect on the industry?

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List of top 25 Exchanges*/ATSs using ATS systemsRank Exchange/ATS Value Traded

(2008) $mTrading System Use of

consultant / SI1 NASDAQ OMX (US) 36,446,548.50 In-house(ex ATS)

2 NYSE Euronext (US) 33,638,937.00 In-house(ex ATS)

3 BATS (US) 7,800,000.00 In-house(ex ATS)

4 London Stock Exchange 6,473,611.60 In-house / outsource Accenture5 Tokyo Stock Exchange 5,586,327.10 In-house / outsource Fujitsu6 Deutsche Borse 4,724,486.10 In-house Accenture7 NYSE Euronext (FR) 4,454,415.20 In-house (ex-ATS)8 DirectEdge (US) 3,800,000.00 In-house (ATS)9 Shanghai Stock Exchange 2,586,680.60 Package (Xetra) Accenture10 BME (Spain) 2,438,646.50 In-house BME Consulting11 Toronto Stock Exchange 1,736,084.90 In-house12 HK Exchanges 1,629,259.90 In-house Compaq13 Borsa Italiana 1,526,237.20 ASP (LSE) Accenture14 Swiss Stock Exchange 1,509,899.60 Package (OMX)15 Korean Stock Exchange 1,458,516.60 In-house IBM16 Stockholmbörsen 1,354,243.70 In-house (OMX) OMX17 Australian Stock Exchange 1,258,769.00 Package (OMX) OMX18 Shenzhen Stock Exchange 1,241,747.40 In-house19 Taiwan Stock Exchange 837,774.60 In-house20 BM&FBOVESPA 750,250.50 Package (AEMS) AEMS21 National Stock Exchange of India 740,901.50 Package (TCAM) Tata Consulting22 American Stock Exchange 561,602.50 In-house SIAC23 Tadawul (Saudi Arabia) 523,450.00 Package (OMX) OMX24 Oslo Børs 458,078.40 ASP (OMX) OMX25 JSE Securities Exchange 400,758.40 ASP (LSE) Accenture

*WFE Statistics 2008 (with ATSs researched independently)

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Industry Trends – effect on execution centres

• Added together, 86% of business in the top 25 exchanges goes through an ECN-style system

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Industry Trends – Effect on execution centres

• In a theoretical world, and with routing, with all exchanges offerings being equal, market share will tend towards 25% (if there are four participants)

• “Starbucks” comparison• Thus the market will become saturated...

Industry Trends – Business Strategy

• Saturated market competition mode is thus• Minimal overheads• Maximum automation• Maximum business throughput• Possible cross-subsidy of main business streams

(e.g. listings and market data to subsidise trading)

• IT a core role• Needs to be minimal

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6. Conclusions

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Summary – future state architecture?

• Has the time between trading system redevelopment shrunk?• Used to be 10 years

• Designed for speed first, resiliency second• Fewer resiliency components – be brave!• Use of Multicast core to architecture• Use of native protocols plus ITCH OUCH• Standardised on

• C++, • RedHat Linux, • Open source components, • MYSQL or Oracle

• Offer Co-location