Firms Puzzle over IT in Search of Alpha

Terry Flanagan

The global search for alpha is triggering investments in trading infrastructure, including co-location, connectivity and market data feed handlers.

NYSE Technologies, the commercial technology arm of NYSE Euronext, has launched Global Liquidity Centers (GLCs) in Toronto, Tokyo and elsewhere, to enable brokers who pursue multi-market, automated trading strategies to trade in co-location to new markets.

“International trading isn’t new, but what is new is the desire to trade non-U.S. markets electronically,” said Jeff Drew, liquidity center program director at NYSE Technologies.

The GLCs provide a one-stop shop for trading firms that want to trade electronically in new markets, but want to avoid capital and operating expense while getting started quickly.

For an annual fee, trading firms receive high-performance access to markets, market information and other essential electronic trading infrastructure services. Liquidity Centers offer the same technology and support as NYSE Euronext’s US and European data centers.

“Typically ,a U.S.-based hedge fund that wants to trade electronically in Toronto needs to install servers to run their algos, market data feed handlers and network connectivity from the U.S. to Toronto,” said Drew.

The idea is to “free the customer from buying and operating the extensive hardware, software and networking required by in-house trading operations”, Drew said. Instead, traders can dip their toe into a new market by ‘renting’ the infrastructure with only a one year commitment. Frequently, customers can be running one month after signing their contract.

Services in the GLCs include Compute on Demand, a managed blade service designed to host algorithms and supporting software, and SuperFeed, a hosted market data feed service.

The company has recently launched a new interactive global map website to show the growing availability of these services as they go live at globalliquiditycenters.com. The web site includes resources such as white papers, symbol lists, etc.

NYSE Technologies views Toronto as a top global trading destination as evidenced by its 40% growth in trading activity, multiple alternative trading systems as well as energy and mining depth.

The Toronto GLCs, located in Markham and in Q9 Networks’ data center, provide co-location to the Alpha, Pure exchanges, TMX, and the Montreal Derivatives Exchange. Chi-X, and Omega are in proximity to the Liquidity Centers.

Equity markets in Canada are seeing fast-moving developments with the launch of a new alternative trading system by Chi-X Canada, completion of the Maple-TMX deal and major regulatory changes aimed at market structure looming just ahead.

Everyone’s waiting to see whether TMX will move Alpha to their own data center or leave it in Q9. Either way, it increases the likelihood that Chi-X will become more important.

Chi-X Canada plans to launch a second lit marketplace, CX2 ATS, in the first quarter of 2013. With CX2, Chi-X Canada will establish a unique and different market model and further provide the trading community with greater choice and functionality, according to the company, which is controlled by global exchange operator Chi-X Global.

Canadian securities regulators have launched sweeping policies aimed at controlling risks associated with the speed and automation of electronic trading, and ensuring that marketplaces actively monitor their risks.

The framework, called National Instrument 23-103, will require marketplace participants who enter orders electronically to maintain policies, procedures and controls to manage the risks associated with electronic trading.

NI 23-103, which is to go into effect on March 1, 2013, imposes requirements on marketplaces for availability of order and trade information, marketplace controls relating to electronic trading, marketplace thresholds and erroneous trades.

However, there’s still uncertainty about whether NI 23-103 will apply to derivatives as well as equities.

“Some say that derivatives are in scope and others say they’re out of scope,” Drew said. “So brokers are not entirely sure what regulators will be enforcing on March 1. Regardless, if you’re considering this market for the first time, it’s a good idea to take expert advice and review the full range of IT setup options.”

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